Rick Wilson (O'Connor, Liberal Party) Share this | Hansard source

The member for Casey is exactly right: today I rise to speak about the Tax and Superannuation Laws Amendment Bill (2014 Measures No. 7) Bill 2014 but with particular emphasis on the Exploration Development Incentive. People who have been in the mining and resource industries for many years know that mining is cyclical and that with the ups comes the downs. All levels of government know the importance of the industry, and the federal government is working hard to show its support. We have already eliminated two major threats to the industry—the carbon tax and the mineral resource rent tax.

The Exploration Development Incentive is of great importance to my electorate and is yet another measure the federal government is putting in place to assist the exploration, mining and resources industries to get back on track. I am proud that Kalgoorlie, one of Australia's premier mining centres, is a big economic driver in my electorate. In 1893, when Irishman Paddy Hannan struck gold in Kalgoorlie, Kalgoorlie was born by the fortune-seekers from across the country descending on the region. Over the next 120 years, the mining of gold, along with other metals such as nickel, has been a major industry and today employs about one-quarter of Kalgoorlie's workforce and generates a significant proportion of its income.

The Super Pit, the biggest open pit mine in Australia, is located right next to the town and has been operated by Kalgoorlie Consolidated Gold Mines since 1989. At 3.6 kilometres long, 1.6 kilometres wide and a depth of more than 600 metres, the Super Pit is as deep as Uluru is high and about the same circumference. The Super Pit produces up to 850,000 ounces of gold every year. But, as great as the Super Pit is for the Goldfields' economy, the current reserve has a finite life, as all current deposits do. This is an important point when looking at the future of the region's economy and also Australia's.

While greenfields exploration expenditure has remained relatively stable in real terms over recent years, it has fallen as a proportion of total exploration from 40 per cent to 33 per cent over the last decade. In December 2014, the Australian Bureau of Statistics reported that quarterly exploration expenditure had halved in the two years to September 2014, with metres drilled down by more than a third over the same period. Tax incentives for small mining companies to undertake exploration is not a new concept. They applied during the 1960s and 1970s and were one of the factors that produced the various mining booms of that era. These incentives were later repealed.

The Henry tax review recommended that, if earlier access to tax benefits from exploration expenses is to be provided, it should take the form of a refundable tax offset at the company level for exploration expenses incurred by Australian small-listed exploration companies, with the offset set at the company income tax rate. The mining sector has long sought a form of incentive that recognises the long lead times between investment, exploration and production. Small exploration companies often must wait many years before tax losses from exploration expenses can be utilised. Many will never generate sufficient income to utilise their losses.

Last year, the Minister for Industry, the Hon. Ian Macfarlane, chose Kalgoorlie to regionally launch the Exploration Development Incentive scheme. Starting on 1 July 2014, the EDI is a $100 million incentive allowing investors in junior companies to deduct a proportion of exploration expenditure against their taxable income. The introduction of the EDI shows the government recognises that mining is a capital-intensive business. Mining is a high-risk business, particularly when companies are starting up their exploration. Most exploration happens to be unsuccessful, but that is not a reason not to do it. It has even been likened to gambling—you could spend a lot of money, with no guarantee of finding any new deposits. But the geological knowledge from that exploration is invaluable and will be available for other exploration efforts to work with. The company may not make any money with it, but it will contribute to more efficient and targeted prospecting in the future.

The EDI will create better incentives and more opportunities for businesses and individuals to succeed. It will strengthen the pipeline to ensure that future mining activity continues to underpin the growth of the Australian economy, allowing investors to deduct a proportion of mining exploration expenditure against their taxable income. While in Kalgoorlie, Minister Macfarlane reiterated:

Exploration is a precursor to development and production and exports. If you're not doing the exploration work then the future looks grim.

Greenfields exploration involves discovering new deposits in new geographical locations rather than areas surrounding known ore deposits. The discovery of new deposits is important for the future supply of resources, as existing deposits will eventually be depleted. Greenfields exploration is high risk, but it can provide large rewards if a new deposit is discovered. At the moment, we are facing the reality of a 10-year low in greenfields exploration, and although there are some drillers who remain pessimistic about the EDI and think it is not enough, in reality the $100 million will generate $300 million worth of capital for exploration. If we have long-running operations looking at closing in the next five to 10 years, we need to be finding the new deposits now so that the industry will keep running for another 100 years.

The purpose of these amendments is to encourage investment in Australian junior mineral exploration companies through the creation of a new form of tax credits to be known as the Exploration Development Incentive Credits. These credits arise from the amount of exploration expenditure that is unable to be claimed as a tax deduction by these companies. Junior companies can currently raise their exploration funding either from the stock market or via agreements with senior mining companies or other investors; they do not have internal sources of investment capital on which to draw. While junior companies are relatively small in size, they undertake a significant proportion of petroleum and other minerals exploration, often undertaking activity on behalf of larger companies. Typically, exploration costs far exceed the profits, if any, generated by junior mineral exploration companies. Such losses are very rarely utilised, as these companies rarely make sufficient profits to fully utilise all of their accrued losses as tax deductions.

The South Australian Chamber of Mines and Energy Chief Executive, Jason Kuchel, said:

Many people do not realise that the junior sector is critical to resource development, being the "engine room" needed to find the mineral resources upon which the economy is so dependant.

Senior mining companies are subject to a number of important limitations, which effectively prevent them from issuing EDIs. Only a greenfields mineral explorer can issue EDIs. A greenfields mineral explorer is identified as having: greenfields minerals expenditure for the relevant income year; both a constitutional corporation and a disclosing entity for Corporations Law purposes; and    neither itself, nor 'any other entity that is connected with or is an affiliate of the entity' extracted minerals for the purpose of producing assessable income. The amounts must be spent in relation to exploration activity: only within mainland Australia—where expenditure incurred in relation to offshore exploration for any mineral cannot give rise to an EDI; where the exploration company holds a mining, quarrying or prospecting right; and where the area under exploration has not been identified as containing an 'inferred' resource.

The tax offsets provided through the incentives are capped at $100 million over three years. The cap manages the cost to the budget and protects it from fluctuations in greenfields exploration expenditur When the EDI was announced, Chief Executive of the Chamber of Minerals and Energy of Western Australia Reg Howard-Smith said:

CME has been calling for incentives, such as a mining exploration tax credit, to boost the critical minerals exploration sector.

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We have seen the competitiveness of Australia as an attractive place for exploration expenditure decline with research showing Australia's share of global exploration has reduced from 21% in 2002 down to only 12% in 2012.

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Exploration is the lifeblood of future industry. With sensible and encouraging policy initiatives such as the Exploration Development Incentive, there are positive signs for establishing the future pipeline of projects.

There have been two other major wins for the resources sector since this government's election. In July 2014, we repealed the carbon tax, saving Australia's minerals industry $1.2 billion a year when the price of emissions permits, the impact on diesel fuel and higher energy charges are included. The carbon tax alone would have cost mining companies an additional 6c per litre on diesel, increasing operational costs significantly.

The Australian Mines and Metals Association were emphatic in its support of the carbon tax repeal. AMMA chief executive Steve Knott said:

Repealing the carbon tax removes one of two ideologically driven, flawed taxes imposed by the former government that have added unnecessary costs and risk to investing and doing business in Australia.

In September 2014, we repealed the mineral resources rent tax, which damaged international investor confidence in Australia, particularly in the energy and resources sector. The repeal of the MRRT and its associated expenditure will not only improve the budget bottom line but also save millions of dollars in compliance costs for small, medium and large entities.

After the repeal of the MRRT, Chief Executive of the Minerals Council Brendan Pearson congratulated the Senate for being able to find common ground. He said:

In just four sitting weeks, the new Senate has repealed the carbon and mining taxes thus demonstrating that with policy intent and goodwill the Australian Parliament can remove the blockages to stronger and more durable economic growth.

Rio Tinto chief executive Sam Walsh said he strongly supported the repeal of the tax. He said:

This will be a positive step for investment and good for jobs in the mining sector.

The MRRT was never necessary as Australians were already sharing in the benefits of the mining boom through the high company tax payments, royalties and community spending.

Fortescue Metals Group chief executive Nev Power said the repeal would encourage Fortescue to continue contributing to Australian society in other ways. He said:

The repeal of the MRRT is a sign that Australia is open for business and serious about encouraging mining development and investment.

But there are still threats to the resources industry, including the WA state government's current review of mining royalties, specifically the review on the gold royalty. Gold mining is an industry that has sustained Western Australia since the late 1800s. In WA alone, the gold mining industry employs approximately 20,000 people. The gold sector pays more than $300 million in taxes and royalties to the government of Western Australia which helps build our roads, schools, hospitals and police stations. Any increase could put jobs and, ultimately, communities at risk. Any rate royalty increase will have a significant impact in the region.

According to a report by Deloitte for the Gold Royalties Response Group, over the past six years the average cost of gold production for WA gold mines has doubled from $511 an ounce to at least $1,100 an ounce. As production costs have risen, companies have had to shed staff. Doray Minerals Managing Director Allan Kelly has claimed the industry cannot bear any additional costs. He said:

WA gold miners continue to face tough operating conditions. Any increases in royalties will see mines close and jobs lost. More than 4,000 direct jobs in gold were lost last year as a result of miners being forced to downsize and the reality is that any additional costs will result in more job losses and seriously damage our industry.

Mr Kelly rejected any suggestion that phasing in a royalty increase over a number of years would be an acceptable outcome for the gold industry. He said:

This would simply mean death by a thousand cuts for gold miners. Such a move would damage investor confidence and erode any positive sentiment in the sector.

We cannot keep hammering our productive industries. I will oppose any move that places more pressure on the gold industry. I urge the Western Australian government to seriously consider the impact any changes to gold royalties would have on the viability of small- to medium-mining operations in my electorate.

But back to the bill currently before the House. Another organisation to see the benefit of the EDI is the Minerals Council of Australia. In December last year Dr John Kunkel, Deputy Chief Executive of the Minerals Council of Australia, released a statement in which he said:

The Excess Exploration Credit Tax Bill 2014 recognises the need to reinvigorate Australia's exploration effort.

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The EDI is a timely and practical commitment to the future of the Australian minerals industry with small Australian exploration companies facing real challenges securing capital. Available to junior companies with no taxable income and to their investors, the EDI addresses the situation whereby junior explorers are unable to access the immediate deduction for exploration expenditure. Importantly, it will allow explorers to leverage additional investment in their companies and to retain existing shareholdings.

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The EDI will make exploration investment in Australia more attractive and it deserves universal parliamentary support.

Dr Kunkel is completely right: even if an exploration program, financed in part by the issue of EDIs, should not find any deposit, the geological knowledge from that program will be available for other exploration efforts to work with. As such, any EDIs issued will still have a positive outcome even if no actual economic discovery is made, as it will contribute to more efficient and targeted prospecting in the future. The incentive recognises that the future prosperity of the mining sector and the Australian economy is dependent on our ability to make new mineral discoveries.

Along with repealing the carbon tax and MRRT, the EDI is about ensuring that we regain and maintain the momentum of discovery and ensure that we have a rich and prosperous way forward. I would like to thank and acknowledge the member for Brand, who last night indicated the opposition's support for this legislation, and welcome the bipartisan position on this vitally important boost to the exploration industry. To anyone eligible in my electorate, I cannot stress enough how important it is for you make the most of the EDI. There is a long way to go before we can say we are anywhere near the top of the cycle, but at a federal level at least, we are doing everything we can to make sure that comes sooner rather than later. I commend this bill to the House.

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