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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.

Petroleum

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.

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