What is the Exploration Development Initiative?

12 December 2014

Phillip Murdoch , Partner, Audit & Assurance |

Australia has a wealth of natural resources within its territory, from gas to minerals. However, many potential sources of these valuable materials have yet to be discovered and developed. 

To promote investment in exploration activities aimed at making the most of these opportunities, the federal government announced the Exploration Development Incentive (EDI) in the spring of 2013. In theory, this initiative should help spur mining activities that establish new projects for mineral extraction. 

Under the scheme, junior mineral explorers with no taxable income can claim credits as a refundable tax offset to pass onto their investors. The funds are provided to mitigate the cost of greenfields mineral exploration. This includes activities required to determine the existence of mineral resources, identify their location and assess their volume and quality.

However, there are a number of restrictions that limit the initiative's ability to serve as an effective incentive to investors. These include: 

  1. Only $25 million in credits are available for the 2015 fiscal year - a far cry from the $3.27 billion total exploration expenditure undertaken in fiscal year 2014. The total cost of the scheme is capped at $100 million.
  2. It could take up to two years for investors to receive returns from the incentive after spending money on activities, which is burdensome for cash-strapped companies.
  3. To qualify, exploration must be for "greenfields" sites, which are new mineral resources. This excludes projects intended to develop sources for quarry materials, petroleum (including coal seam gas), shale oil and geothermal energy resources. 

Although these limitations are likely to prevent the incentive from strongly encouraging additional exploration, it is a positive step forward in supporting these projects. Junior explorers may need to pursue additional means to improve their cash flow, but they can benefit from the opportunity to utilise their tax losses to their advantage.