background image

Australia Issues Taxation Determination on What Constitutes Use of a Mining, Quarrying, or Prospecting Right for Depreciation Purposes — Orbitax Tax News & Alerts

The Australian Taxation Office has issued Taxation Determination (TD) 2019/1 - Income tax: what constitutes 'use' (and potentially first use) of a mining, quarrying or prospecting right, that is a depreciating asset, for the purposes of subsection 40-80(1) of the Income Tax Assessment Act 1997? TD 2019/1 notes that generally, Division 40 provides deductions for the decline in value of a depreciating asset a taxpayer holds over the asset's effective life. By contrast, under section 40-80 the decline in value of a depreciating asset a taxpayer holds is the asset's cost where certain requirements are met. Two of these requirements are:

  • the taxpayer must first 'use' the asset for exploration or prospecting for minerals, or quarry materials, obtainable by mining and quarrying operations, and
  • when the taxpayer first uses the asset they do not 'use' it for development drilling for petroleum, or operations in the course of working a mining property, quarrying property or petroleum field.

In this respect, TD 2019/1 includes the following ruling:

  1. You 'use' a mining, quarrying or prospecting right (MQPR) when you do something that the MQPR permits or authorises.
  2. Merely holding, or meeting the conditions or requirements to hold, or retain, an MQPR does not constitute a 'use' of it. For example, designing an exploration plan to meet the requirements for holding an exploration right would not amount to a 'use' of that right, whereas exploratory drilling on the tenement would be a 'use' of the right.
  3. To determine whether a particular action amounts to a 'use' of an MQPR, we must look to the terms of that MQPR. Ordinarily, it would require activity in the area over which the MQPR is granted.
  4. Activities that are neither permitted nor authorised by the MQPR, or that you could undertake without holding the MQPR, are not a 'use' of the MQPR.
  5. We (the ATO) accept that a holder of an MQPR can 'use' an MQPR where another entity (for example, a joint venture partner or a contractor) who is authorised by the holder does an activity on its behalf that would have been a 'use' if done by the holder.
  6. There is no explicit requirement that the 'use' must exploit the inherent characteristics of the MQPR. However, a trivial act on the tenement will not amount to a 'use' because the law does not concern itself with trifles.

Click the following link for the full text of TD 2019/1, which includes several examples. The determination applies to years of income commencing both before and after 13 February 2019, although it will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before that date.