However, lurking in the Income Tax (Transitional Provisions) Act 1997 are a number of transitional provisions impacting the depreciable status of mining and exploration rights which can impact the value ascribed to a project where tax depreciation deductions are denied under Division 40. In summary, these include:
- mining and exploration rights held before 1 July 2001 are not eligible for tax depreciation deductions, but are instead subject to the capital gains tax (CGT) provisions. A direct acquisition of such rights on or after 1 July 2001 should mean they are depreciable, but be mindful of various associate rules
- renewals or extensions of mining and exploration rights held before 1 July 2001 also continue to be non-depreciable for tax purposes
- where a mining or exploration right held before 1 July 2001 ends, and a replacement or new right is issued on or after 1 July 2001 relating to the same area or any difference in area is not significant, the replacement or new right cannot be depreciated and instead follows the same tax treatment as the pre-1 July 2001 right
- in a share acquisition, if the target company holds any mining or exploration rights subject to the transitional provisions, the rules continue to apply. In the context of tax consolidation, while the rights receive a reset cost base for CGT purposes they continue to be non-depreciable.
In any due diligence, the tax profile of mining and exploration rights warrants particular attention, particularly where any of the transitional provisions apply which can impact tax depreciation deductions going forward and cash tax outcomes.