General mining

19.A3. The Income Tax Assessment Act distinguishes petroleum exploration from general mining in its treatment of capital expenditure incurred in such operations. Section 122J allows a deduction for expenditure on exploration or prospecting on any mining tenements held in Australia or Papua New Guinea for minerals obtainable by prescribed mining operations. This allowance is limited to those categories of operations within the purview of the definition of ‘exploration or prospecting’ in subsection (6) of section 122J.

‘Exploration or prospecting’ means any one or more of the following:

  • (a) geological mapping, geophysical surveys, systematic search for areas containing minerals, and search by drilling or other means for minerals within those areas; and
  • (b) search for ore within or in the vicinity of an ore-body by drives, shafts, cross-cuts, winzes, rises and drilling,

but does not include operations in the course of working a mining property.

19.A4. The expression ‘prescribed mining operations’ is defined in section 122 (1) to mean mining operations on a mining property in Australia for the extraction of minerals … from their natural site, being operations carried on for the purpose of gaining or producing assessable income. The definition excludes gold mining since income derived from gold mining is exempt under section 23 (o).

19.A5. The deduction is allowable only from income derived from the carrying on of a mining business or associated activities and the taxpayer must have been engaged in a mining business. Thus, where a taxpayer does not derive assessable income from a mining business, he will be obliged to defer deduction of any such exploration

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expenditure until such time as assessable income is so derived. The amount of the deduction is limited to the amount (if any) of ‘assessable income’ remaining after deducting all other allowable deductions that directly relate to such business. Where the exploration expenditure incurred in the year of income exceeds the amount allowable as a deduction in that year, it is, by virtue of sub-section (4) of section 122J, carried over to the next and successive years in which ‘prescribed mining operations’ are carried on until the entire amount has been absorbed by deduction against mining income.

19.A6. The deduction is not necessarily limited to capital expenditure so that, in some cases, a deduction may be available under section 51 in addition to section 122J. Where both are applicable, the section under which the deduction is allowable depends upon the Commissioner's discretionary decision under section 82 (1) as to which is the more appropriate. This finds significance in the fact that losses resulting from a section 51 deduction are subject to the time-limit on carry-forward, whereas a deduction under section 122J carries no such restriction. In addition, expenditure on ‘plant’ used in exploration activities is deductible under section 122J unless the taxpayer makes an election under section 122H which invokes the general depreciation provisions of the Act (sections 54 to 62) in relation to such plant. Thus, where plant can be said to have been used for the purpose of producing assessable income, an alternative deduction will be available for depreciation.

19.A7. It appears that the section was inserted in the Act (in 1947) to allow a deduction for a class of expenditure that would not otherwise be deductible and to equate the position of such expenditure with petroleum exploration expenditure, which had been deductible since 1939.


19.A8. Expenditure incurred in exploration or prospecting for petroleum is treated on an identical basis to general mining. Under section 124AH of the Act, expenditure incurred in ‘exploration and prospecting’ is an allowable deduction in the year in which it is incurred. The taxpayer must derive assessable income from petroleum in that year and the amount of the deduction is limited to the amount of such income remaining after deducting all other allowable deductions.

19.A9. If the expenditure on exploration or prospecting exceeds the amount deductible in any year, the excess is carried forward for deduction against similar income of the next and subsequent years until the entire amount is absorbed.

19.A.10. ‘Exploration or prospecting’ is defined in section 124AH (7) so as to include geological, geophysical and geochemical surveys, exploration drilling and appraisal drilling but excludes development drilling or operations in the course of working a petroleum field.

Transfer to Purchaser of Benefit of Deduction

19.A11. Where, by virtue of section 122J (4), there is an amount of exploration or prospecting expenditure which is not deductible in the year it was incurred, the taxpayer (vendor) may in effect transfer his entitlement to a deduction by a notice under section 122B (1). A similar provision enables a corresponding deduction to be transferred to the purchaser of a petroleum prospecting or mining right or information (see section 124AB). Transfer under section 122B (or section 124AB) is available where the taxpayer sells a mining or prospecting right or mining or prospecting information. The expenditure by the purchaser on acquiring the mining or prospecting right or

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prospecting information will become allowable capital expenditure of the purchaser to the extent of the amount nominated by the seller and the purchaser in a notice given to the Commissioner.

19.A12. It appears that entitlement to deductions for expenditure on exploration or prospecting may be passed on under section 122B, notwithstanding that the expenditure was not incurred in relation to the area to which the mining or prospecting right or mining or prospecting information the subject of the sale relates. The purchaser will be entitled to deductions under section 122D in respect of what is (after the sale) his residual capital expenditure, even though deductions by the seller would have been indefinitely deferred pending his entry on prescribed mining operations.

19.A13. Exploration expenditure which is not the subject of a notice under section 122B or section 124AB remains available for deduction by the taxpayer who incurred it, notwithstanding that he has disposed of the information gained by the exploration operation or has disposed of his right to explore or mine in the area to which it relates. Section 122B was added in 1968 to rectify the discrimination in this regard between general mining and petroleum mining, to which the former section 124DE had applied since 1963.

19.A14. Both provisions enable a vendor to capitalise outgoings incurred by him in exploration and to transfer any accrued income tax benefit to a purchaser and for the latter to claim the benefit of such a deduction although the cost was not originally incurred by him.

United Kingdom

19.A15. Under the United Kingdom Capital Allowances Act 1968, a ‘writing-down’ allowance is available in respect of expenditure on exploration. No distinction is made between the treatment of exploration and development expenditure for the purposes of this allowance, though certain other allowances made in respect of development expenditure (e.g. the initial allowance referred to later) are not made available in connection with exploration expenditure. The writing-down allowance closely resembles section 122D of the Australian Act in that exploration and development expenditure may be amortised over the life of the mine. Further, it is available to taxpayers carrying on a business which consists of or includes the working of a mine. It is computed by applying to the residue of qualifying expenditure the quotient obtained when the output of the mine in the tax period is divided by the total estimated output of the mine (or one-twentieth, whichever is the greater).

19.A16. This allowance extends to abortive exploration expenditure (which is immediately deductible as a business expense if taxpayer carries on a mining business) and expenditure on machinery or plant used for exploration. Where the mine ceases to be worked, the person carrying on the trade may elect that the writing-down allowances, if any, for any assessable year which begins within six years before that event shall be revised. If he so elects, the writing-down allowance for that (or those) period(s) is revised, so that it is computed with the substitution of the actual output of the mine in lieu of the previous estimate.

19.A17. A depletion allowance is available with regard to the costs of acquiring a mine in lieu of a write-off. (The amount of the allowance varies from 50 per cent to 10 per cent of the royalty value of output according to the length of the period between acquisition and production.) However, the cost of acquiring a mine or mining rights

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outside the United Kingdom may be made the subject of a write-off allowance under the provisions outlined above.


‘Principal Business Corporations’

19.A18. The distinction between exploration and development expenditure is preserved under Canadian legislation. Section 66 (15) (h) of the Income Tax Act defines a ‘principal business corporation’ as a corporation whose principal business is (i) production, refining or marketing of petroleum, petroleum products or natural gas or exploring or drilling for petroleum or natural gas; (ii) mining or exploring for minerals; (iii) processing mineral ores to recover metals therefrom; (iv) a combination of (iii) and processing metals recovered therefrom; (v) fabricating metals; or (vi) operating a pipeline for the transmission of oil or natural gas. A ‘principal business corporation’ is allowed to deduct the aggregate of its past exploration and development expenditure incurred in Canada up to a limit represented by the amount of net income for the taxable year before deduction of depletion allowances or losses carried forward, but reduced by deductible dividends received. The provision resembles section 122J of the Australian Act and includes in the base of capital expenditure deductible under this heading the cost of any ‘Canadian resource property’, including amounts paid for the acquisition of mining rights (whether oil, gas or minerals). Any such costs not deducted in the year may be carried forward indefinitely against income from future years.

19.A19. The provision applies to:

  • (a) the cost of searching and drilling for petroleum and natural gas; and
  • (b) the cost of prospecting, exploration or development expenditure incurred by a taxpayer in searching for minerals.

In Canada the Act accords different treatment to each of the above categories, since exploration and development expenditure incurred with regard to petroleum or natural gas is immediately deductible in the manner indicated above whereas in the case of general mining this provision relates only to exploration and other costs incurred up to the time of development of the mine for production. It appears that the oil and gas allowance is so framed because of the practical difficulty involved in distinguishing petroleum ‘exploration’ from ‘development’ expenditure.

Taxpayers Other than ‘Principal Business Corporations’

19.A20. The deduction for exploration and development expenditure is limited to the amount of income derived from the oil or gas well or mine or royalties therefrom, together with the amount by which a consideration received on sale of a mine exceeds the amount that would ordinarily be allowed as capital expenditure in respect thereof; alternatively, the limit is 20 per cent of the accrued undeducted exploration and development expenses if that amount exceeds the amount of income described above. (If the taxpayer's ‘income from Canadian resources’ is insufficient, he may deduct up to 20 per cent of the allowable expenditure from income derived from other sources.) A similar allowance is available for foreign exploration and development expenses.

19.A21. It will be observed that the provisions outlined above are directed towards enabling immediate write-off of exploration expenditure against income and this appears to have been prompted by the recognition that, in the words of the Carter

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Commission (1966): ‘The more uncertain the value of the asset created by a particular expenditure, the more rapidly the cost should be written off. Because the probability of success for a particular exploration venture is usually low, it is reasonable to deduct exploration costs immediately in determining income’.

United States

19.A22. An unlimited deduction against taxable income is available on an optional basis for exploration expenditure (except if incurred on oil and gas) provided that the amount deducted is brought to account as income (or ‘recaptured’) when the mine reaches production or is sold. This is accomplished by the taxpayer electing either to (i) include the previously deducted exploration expenditure chargeable to the mine as income for the year in which the mine reaches production or is sold, increase the ‘basis’ of the property by the amount included as income, and subsequently recover this amount through depletion, or (ii) forgo depletion from the property until deductions forgone equal exploration expenditure previously deducted. Expenses not recaptured by any of these methods are recaptured on the sale or disposition of the mining property.

19.A23. Exploration-type expenditure which is incurred during the development or producing stage of a mine is treated as development expenditure deductible currently, rather than mining exploration expenditure subject to recapture.

19.A24. With regard to oil and gas well drilling expenditure, a taxpayer may elect to treat drilling expenditure as a current expense deductible in the year in which it is incurred or, alternatively, as a charge to capital which is recoverable through depletion or depreciation as ‘intangible drilling and development costs’. If he elects for the latter alternative and the well later proves to be non-productive, he may elect to deduct such costs as an ordinary business loss. Thus, in oil and gas exploration, capital investment is usually recovered in full.

South Africa

19.A25. Exploration or prospecting expenditure may, in certain cases, be deducted in toto from mining income in the year in which it is incurred, or over the life of the mine, according to the discretion of the taxing authority. This twofold approach resembles section 122J of the Australian Act in that an immediate write-off is generally allowed if the mine has reached the production stage. Where a mine has not reached the production stage, no portion of the capital expenditure can be deducted since such expenditure may only be deducted from income derived from mining operations. In such a case, the capital expenditure is accumulated and amortised over the life of the mine.

19.A26. In relation to mines that commence production in any years of assessment after 31 December 1973, capital expenditure (whether on exploration or development) incurred after that date is fully deductible and may, if it exceeds the assessable income of the enterprise, promote an assessed loss. A balance of any assessed loss incurred in a previous year of assessment may be carried forward to the succeeding year of assessment to be set off against income derived from any other business in the Republic. If in any year of assessment the taxpayer does not carry on any other business, he is not permitted to carry forward to this year any balance of assessed loss established in respect of the immediately preceding year of assessment. In this way, the taxpayer forfeits his right to claim a deduction for the accumulated loss.

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New Zealand

19.A27. The outlay by a mining enterprise on both exploration and development is deductible in the year in which it is incurred. The capital expenditure provisions under relevant New Zealand legislation allow mining companies a deduction for exploration and development expenditure incurred and those companies are subject to income tax on mining income at only two-thirds of the rate applicable to other companies. This includes expenditure incurred as consideration paid or payable for the acquisition of an asset. This situation extends to certain specified minerals and petroleum. In relation to specified minerals, the concession applies to the accumulation, processing to the stage of concentration, and transport of the products to the stage where they are in saleable form and at a location suitable for acquisition by a purchaser or are ready to be processed beyond concentration, or used in a manufacturing operation.

19.A28. There is little restriction on the nature of capital expenditure by a mining company that qualifies for deduction: the entire outlay on exploration and development is deductible. Section 153F (12) requires the salvage value of any mining asset disposed of subsequently (or transferred to non-mining activities) to be returned as assessable mining income at that stage.

Mining Companies

19.A29. Section 153F provides the basis of assessment of mining companies and states that the assessable income is to be divided into mining and non-mining income. These special mining provisions apply only to New Zealand companies whose sole or principal source of income is mining in New Zealand for specified minerals and/or petroleum, or exploration and searching for minerals or petroleum for a reward related to and dependent on production or participation in profits from production of any specified mineral and/or petroleum.

19.A30. Mining expenditure is allowed first against assessable mining income of that same year, and two-thirds of any excess against other assessable income derived in that year. Any excess of non-mining expenditure over non-mining assessable income is allowed in full against mining income.

19.A31. Loss carry-forward. There is no time-limit on the availability of past losses for set-off against subsequent profits. Where mining expenditure is carried forward as a loss against income of a subsequent year, or past non-mining losses are carried forward against mining income, that carried-forward loss takes into account the differential in tax rates between mining and non-mining income. Such losses are offset firstly against the same class of income in that subsequent year and any excess mining loss then allowed against non-mining income. In such an event the balance of any non-mining loss available for carry forward is reduced by 150 per cent of the mining loss deducted from non-mining income.

19.A32. Appropriations. Either a mining company or a non-resident mining operator may appropriate income for expenditure within two years on exploration and development and may elect to claim a deduction of that amount against the income of the year to which those appropriated profits relate. The amount so allowed as a deduction is treated as assessable income of the succeeding year. The relevant expenditure incurred may be claimed as a deduction in that succeeding year, subject to a further right to claim as a deduction in that year any unexpended portion of that initial appropriation and, subject to the same general terms, make any new appropriations in respect of the succeeding two-year period. This will not apply if the result

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would be to put the taxpayer into a loss situation for the year's result overall. The effect of this provision, it will be noted, resembles the former section 122G of the Australian Act, except that the latter applied essentially to development expenditure. Such an appropriation provision enables a company to preserve its liquidity during the exploration stage of a mining venture in anticipation of substantial capital outlay.

Mining Operators

19.A33. Section 153J covers the tax position of those New Zealand residents who do not come within the definition of a mining company but are engaged in or propose engaging in mining or associated operations as a business. Exploration and development expenditure is deductible as for mining companies but there is no deduction available for appropriations. The concessional tax rate does not apply to mining income. Mining losses are firstly to be offset against mining income of any year, with any excess available to be offset against other income. There is a restriction that a mining loss can be offset only as to 50 per cent against other income in any income year. Where a non-mining loss is offset against mining income, there is no such restriction.

Non-resident Mining Operators

19.A34. Section 153K covers all non-resident persons (individuals and companies) engaged in New Zealand in a business venture principally involving mining operations. Exploration and development expenditure is deductible in similar fashion to resident mining companies, as also are amounts appropriated for such expenditure in the event that an election to that effect is made. The total income of non-resident operators relating to mining activities is taxable separately at the flat rate of 45 cents in the dollar.

19.A35. It will be observed that the New Zealand provisions do not discriminate between development and exploration costs, as immediate write-off is available in respect of each category. Further, the availability of a limited right of set-off of mining expenditure against non-mining income serves to ensure that mining exploration concessions may be available to, and utilised by, enterprises engaged in other businesses and infant mining enterprises for which the right of unlimited loss carry-forward preserves the value of accrued deductions for exploration expenditure.