On 3 March 2015, legislation introducing the Exploration Development Incentive (EDI) officially passed the Australian Senate. The legislation is expected to receive Royal Assent in the coming days. The EDI has been introduced by the Government to encourage and stimulate growth in the junior mining industry.

The legislation has been introduced following consultation with industry in 2014. Further background on the introduction of the EDI can be found in our Legal Insight on 8 July 2014 titled 'Introduction of the Exploration Development Incentive'.

What is the EDI?
The EDI is designed to allow shareholders in certain junior miners to receive tax credits for expenditure incurred by the company, and apply those tax credits against the shareholder's own personal tax liability. The tax credits will be available to all shareholders or, at the election of the company, only to holders of shares issued after 1 July 2014.

In summary, under the EDI rules:

• Eligible companies, referred to as 'greenfields minerals explorers', will be able to utilise their tax losses to either reduce their taxable income or to the extent the loss results from eligible exploration expenditure, companies will be able to create tax credits for their shareholders up to a capped amount.
• A company's cap for an income year is based on its exploration expenditure and tax loss for the previous income year, adjusted by a 'modulation factor' to ensure that the total value of all credits provided to all taxpayers in respect of expenditure in an income year does not exceed:
  • AUD25 million for expenditure incurred in 2014-15
  • AUD35 million for expenditure incurred in 2015-16 
  • AUD40 million for expenditure incurred in 2016-17.

Where companies exceed their cap, an excess exploration credit tax will apply.

• Non-corporate Australian resident shareholders, such as individuals and superannuation funds, will be entitled to a tax offset equal to the tax credit created by the company, which will be refundable to them.
• Corporate Australian resident shareholders receiving EDI credits will be entitled to franking credits equal to the amount of the EDI credit, which can then be attached to dividends distributed to their shareholders.
• Australian resident trusts and partnerships that received EDI credits may be able to provide their beneficiaries or partners with a share of the EDI credit so that they may obtain a tax offset, which may be refundable to them.

Eligible Companies and Greenfields Minerals Expenditure
In order to be eligible to create EDI credits, the company must be a 'disclosing entity' under the Corporations Act 2001 (Cth). This will generally include listed companies and certain widely held unlisted companies. However, the scheme will exclude companies that have commenced resources production, as well as companies connected or affiliated with an entity that has commenced resources production. Similarly, companies which form part of a larger group of entities, some of which engage in mining, will not be eligible to participate.

In addition, in order to be eligible to create EDI credits, the company must have incurred greenfields minerals expenditure for the year.

Broadly, and subject to a number of exceptions, greenfields minerals expenditure will include expenditure incurred on exploration or prospecting for minerals.

When Will the EDI be Available?
The EDI will be available in the 2014-15, 2015-16 and 2016-17 income years. The Government has stated that it will review the EDI scheme in 2016 and, subject to the outcome of this review, may decide to extend the program for a further period.

Next Steps
Following the passage of the EDI legislation though Parliament, stakeholders are now in a position to confirm how the EDI rules may apply to them. Please contact us if you require advice in relation to the EDI or would like more information on the opportunities it may create for your company, its shareholders and potential investors.