ATO clarification prompts review of exploration deductions

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The Australian Taxation Office (ATO) has finalised an addendum to Taxation Ruling TR 2017/1, providing further clarification on the meaning of ‘exploration or prospecting’ for the purposes of Division 40 of the Income Tax Assessment Act 1997.

The updated ruling follows consultation in late 2025 and is now final. Importantly, the ATO has confirmed that the clarification applies both before and after the date of issue, meaning existing positions may need to be revisited.

What the ruling covers

TR 2017/1 sets out the Commissioner’s view on the deductibility of mining and petroleum exploration expenditure, including how sections 8‑1 and 40‑730 of the ITAA 1997 apply to expenditure incurred on exploration or prospecting activities.

The March 2026 addendum specifically clarifies the ATO’s interpretation of the ordinary meaning of ‘exploration or prospecting’ in the context of Division 40, rather than introducing new law or changing the legislative framework.

Why this update matters

Exploration expenditure continues to be an area of ATO focus, particularly where costs sit close to the boundary between exploration and later‑stage development activities.

The ATO’s clarification reinforces that:

  • The deductibility of expenditure depends on its character and purpose, not simply when it is incurred; and
  • Care is required where activities move beyond discovering and identifying mineral or petroleum resources and into evaluation or development phases.

Given the ruling applies retrospectively, businesses should be mindful that positions taken in prior income years may also be impacted.

Key implications for mining and energy businesses

While the addendum does not change the underlying law, it provides additional guidance that may affect how exploration costs are assessed and documented. In practice, this may require businesses to:

  • Re‑examine how exploration activities are defined and distinguished from development activities
  • Review the treatment of expenditure incurred during project evaluation phases
  • Ensure internal governance and tax characterisation processes align with the ATO’s clarified view
  • Confirm that supporting documentation clearly demonstrates the nature of exploration activities undertaken.

What businesses should do next

Mining and energy exploration and development businesses should consider whether the ATO’s clarification has any implications for their current or historical exploration expenditure claims. This may include reviewing existing tax positions and seeking advice where expenditure falls near the exploration‑development boundary.

Early review can help reduce the risk of disputes and ensure deductions claimed are consistent with the ATO’s published guidance.

How BDO can help

BDO’s natural resources and energy team can assist mining and energy businesses to understand the implications of the ATO’s updated guidance and assess how it applies to their exploration activities. Our tax specialists can support with reviewing exploration expenditure positions, identifying potential areas of risk, and ensuring deductions are aligned with the ATO’s clarified view.

Please contact your BDO tax adviser for further guidance, or visit our tax services page to see how we can help.

Key takeaways

The ATO clarification refines the meaning of exploration or prospecting
  • The ATO has finalised an addendum to TR 2017/1 clarifying the ordinary meaning of ‘exploration or prospecting’ for Division 40 purposes. While the law has not changed, the guidance provides greater clarity on how exploration expenditure should be assessed and characterised.
Retrospective application increases the importance of reviewing prior positions
  • The ATO has confirmed the clarification applies both before and after its issue, meaning existing exploration deduction positions may need to be revisited. Expenditure near the boundary between exploration and development is likely to attract particular scrutiny.
Clear characterisation and documentation are critical for compliance
  • Mining and energy businesses may need to reassess how activities and associated costs are defined, particularly during evaluation phases. Strong governance and supporting documentation are key to demonstrating that expenditure meets the ATO’s clarified view of exploration activities.

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