Prospecting for tax deductions

The ATO consolidates and clarifies its views about when exploration and prospecting costs are immediately deductible


Earlier this year, the Commissioner of Taxation released TR 2017/1 - Income Tax: deductions for mining and petroleum exploration expenditure (the "Ruling"). The Ruling is the finalised version of TR 2015/D4, issued in December 2015, which replaced TR 98/23 - Income Tax: Mining exploration and prospecting expenditure.

In the Ruling, the Commissioner provides further detail on how he considers expenditure is treated under section 40-730 of the Income Tax Assessment Act 1997 ("ITAA 1997"). Section 40-730 provides an immediate deduction for certain expenditure relating to exploration or prospecting for minerals (including petroleum). The Ruling does not cover section 40-80 of the ITAA 1997 in detail, which provides for an immediate deduction for the cost of assets used in exploration or prospecting for minerals.

The Ruling highlights that the Commissioner will focus on the substance of the expenditure and the purpose behind it in the context of exploration or prospecting. On this basis, understanding the definitions contained within section 40-730 becomes critical to understanding how to obtain deductions under this section.

To give taxpayers some guidance on how the ATO intends to administer the law and the Ruling, from a practical perspective, the Commissioner has also released a related Practical Compliance Guideline (PCG 2016/17) (the "Guideline"). The Guideline outlines the factors that the ATO will consider when assessing a taxpayer's risk of non-compliance and therefore, how likely it is to review an entity's exploration deductions for expenditure. The specifics of the Guideline are not discussed in this update.