Prior to the release of these rulings there was a general view that either:
- the non-cash elements of an exploration transaction had negligible value
- nothing of real value passed between the parties
- non-cash deductible and assessable amounts would generally net off in the same period.
Recently agreed tax changes by the current government will also impact on non-cash consideration in mining exploration deals. In a couple of examples:
- Contingent consideration for exploration rights (e.g. an overriding royalty interest based on future production): There is still uncertainty whether the announced capital gains tax (CGT) earnout rules will extend to the disposal of exploration rights under the capital allowance provisions. Where these proposed rules do not apply, the non-cash value of the contingent consideration may still potentially be taxable on disposal.
- Tenement and mining information swap arrangements: The proposed 15-year write-off for exploration could potentially apply to certain tenement swap arrangements (subject to further consultation). Therefore, a potential tax mismatch may occur between the non-cash gain on disposal of an old tenement and the non-cash deduction for acquiring the new tenement.
In our experience, non-cash consideration in mining exploration transactions is not always obvious and can be difficult to value. Clients can no longer rely on the assumption that there is no value in the non-cash elements or no net tax impact. They must appropriately document the value of both cash and non-cash elements of an exploration transaction and fully consider the tax consequences.