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Thursday, 2 April 1987
Page: 1793

Senator CRICHTON-BROWNE(10.30) —I rise on the adjournment tonight to speak about certain aspects of the capital gains tax as it affects the mining industry. It is, of course, the declared objective of the Liberal and National parties to abolish the capital gains tax as soon as they are elected to office. At the outset I remind the Senate of the difficulties presently being experienced by the mining industry. The price of iron ore has recently fallen. Mount Newman was forced by the Japanese to take a reduction of 3 per cent in the price it was paid for its iron ore. The industry did tip that the reduction could be as drastic as 10 per cent. It was only a little over a year ago that the price of oil fell by more than half. That price has not yet recovered.

Coal prices will continue to be under pressure particularly in view of the reduced demand for coal and iron by Japanese steel mills. As the Government has said, our metal and mineral exports have been savaged by the world market. This is the situation of the mining industry. It is for this reason that the effect that the governments capital gains taxes are likely to be all the more damaging. It is ironic to remember that only shortly before the introduction of the capital gains tax, during debate on the fringe benefits tax, I warned the Government that average returns for the mining industry were only a little over 5 per cent on capital.

I would like to direct the Government's attention to the matter of farm-outs. I remind the Senate that the capital gains tax is supposed to tax capital gains-the making of money from the selling of property. It was never portrayed as taxing what is in effect the raising of capital. Yet in reality that is the effect of the tax in the area of farm-outs.

Typically a farm-out involves one party who holds an exploration permit seeking to share the risks and raise capital by inviting someone else into the project. It is really quite a simple arrangement. The owner of the property offers a share in the venture to another party in accordance with the amount the other party is prepared to expend on the project. This action which is designed primarily as a capital raising venture by the initial owner is regarded as the disposal of the property concerned under the capital gains tax legislation. The farmer may receive no cash in the hand whatsoever from the farmee but is required to pay capital gains tax.

Similarly where the farmee simply enters the project on the basis that he will complete certain work the work is regarded as consideration for the disposal of the equity in the project. Once again there is no cash supplied, but a capital gains tax accrues and the farmer is required to produce the money. In this latter arrangement, where the farm-out takes place by reference to specified work rather than to work to a certain dollar value, there arises the additional difficulty of determining the value of the gain which has arisen. Quite possibly the Australian Taxation Office could make an assessment of the value of the disposal by determining the amount the farmee spent to do the work.

This raises the immediate problem of cost overruns. This could occur because of inefficiency on the part of the farmee. It is hardly fair to assess value of the capital gain to the original owner on the basis of his ability to select efficient farm-out partners. There is also the possibility that the cost overruns are completely beyond the control of the farmee. Say there is an industrial dispute which holds up equipment or supplies perhaps hundreds of miles away. This might cause an extensive cost overrun. Will the Australian Taxation Office make allowances for these eventualities when it attempts to determine the value of the disposal of property on a farm-out?

Whenever an explorer swaps property with another there is an exposure to capital gains tax. This arises because of the extremely limited nature of the rollover relief available under the capital gains tax legislation. A mining explorer may swap property for perfectly valid, economically efficient reasons. It may be that he finds that his equipment or skills are more suited to working in another type of area than the one he owns. A swap may be a highly efficient way of overcoming this. As I pointed out in the debate when this legislation was introduced, it is not the case that people who dispose of property are making great profits.

As I have just demonstrated, it may be that the disposal is made only to invest in another piece of capital. Taxation simply reduces the ability to make that investment. It is inevitable in these situations where there are farm-outs, which are very legitimate, perfectly normal, commercial arrangements, particularly with respect to the oil industry, that there may not necessarily be an accruing cash or financial benefit to the person who is the original holder of the tenement. Yet under the circumstances I have spelled out he may find himself, for a number of reasons, attracting and attaching unto himself a capital gains tax.

The final point I would like to mention while discussing the effect on the capital gains tax on mining farm-outs is the problem which the Govenment continually ignores and with which it continually plagues taxpayers. This is the matter of administrative costs. The capital gains tax legislation requires records to be kept for seven years after the disposal of an asset. These records are to show the calculation of any capital gain or loss and therefore must include not only the price received on disposal but also the amounts included in the asset's cost base.

As I have indicated, calculating the cost base where property is acquired as a result of a farm-out will involve recording the amounts expended as consideration for the equity gained. It may not have occurred to the Government but the exploration and development of a mining tenement or a number of mining tenements or an area may take years. Then there may be a period of operation which could go on for some considerable time. It is possible that records could have to be kept for decades.

The other matter which I would like to raise concerns the statement of the Treasurer (Mr Keating) of 22 May 1986. In that statement he indicated:

Gains realised on the sale, transfer or assignment by `Bona fide prospectors' of mining right relating to gold or metals and minerals which are prescribed under section 23 (pa) will also be exempt from the capital gains tax.

It has been brought to my attention that this may not be the effect of the legislation due to the interaction of the sections of the Income Tax Assessment Act and the capital gains legislation. I seek leave to have incorporated in Hansard section 23 (pa) of the Income Tax Assessment Act.

Leave granted.

The section read as follows-

23. The following income shall be exempt from tax.

(pa) income derived by a person from the sale, transfer or assignment by the person of his rights to mine, in a particular area in Australia, for gold or for any prescribed metal or prescribed mineral, being a person who is a bona fide prospector, that is to say-

(i) a person (other than a company) who has personally carried out the whole or the major part of the field work of prospecting for gold or for the prescribed metal or prescribed mineral, as the case may be, in that area or has contributed to the expenditure incurred in the work of prospecting and development in that area; or

(ii) a company which has itself carried out the whole or the major part of such field work,

except that-

(iii) where, under Division 10, or under the Division for which that Division was substituted, a deduction has been allowed or is allowable from the assessable income of the taxpayer of any year of income in respect of expenditure on exploration or prospecting in a particular area, this paragraph applies to so much only of the income of the taxpayer derived from the sale, transfer or assignment by him of rights to mine in that area as exceeds the sum of any deductions so allowed or allowable; and

(iv) this paragraph does not apply in respect of a sale, transfer or assignment of any right to mine for a metal or mineral, other than gold, if-

(a) any party or parties of the one part to the sale, transfer or assignment has or have the power (whether under the terms of the transaction or otherwise) to control, directly or indirectly, the entry into the transaction by, or the activities in connexion with the mining rights of, a party of the other part; or

(b) any person or persons has or have the power (whether under the terms of the transaction or otherwise) to control, directly or indirectly, the entry into the transaction by, or the activities in connexion with the mining rights of, a party of the one part and a party of the other part to the sale, transfer or assignment;

Senator CRICHTON-BROWNE —Prior to the passing of the capital gains legislation, the section exempted both income as it is normally understood and capital gains because the two capital gains provisions in the Act, section 25a and section 26aaa, deemed what would otherwise be regarded as a capital gain to be assessable income. Following the passing of the Income Tax Assessment (Capital Gains) Act, section 25a no longer applies to property purchased after 19 September 1985. This property is now covered by the capital gains legislation. The effect of removing section 25a is that section 23 (pa) has a more limited operation for property purchased after the September 1985 cutoff date. It now covers only income and not capital gains. No longer are the two, by definition, described as income and exempt under the old definition.

Despite the assurance given by the Treasurer in his statement, it appears that the sale of bona fide prospector's mining rights for prescribed metals particularly will be subject to capital gains tax, even if not income tax. The attempt was made to protect prospectors in section 160 L (7) of the capital gains legislation. That section says that the capital gains tax does not apply if section 23 (pa) applies, but it does nothing to reverse the restriction imposed upon section 23 (pa) by the change which was made to section 25a.

I might point out that the comments that I have made do not apply to gold tenements. They are saved by section 160 L (6) which exempts assets from capital gains tax if they were used for producing exempt income. Income from gold mining is exempt under section 23 (o) of the income tax Act. The point is that prospectors for other metals are liable to capital gains tax when they were not previously. The prescribed metals and minerals which are now exposed in this way were at August last year. I seek leave to incorporate in Hansard a table which demonstrates and defines the prescribed metals and minerals as such.

Leave granted.

The table read as follows-


Ores of

















Manganese Oxides






Quartz Crystals


(piezo-electric quality)


Radio-active Ores












Senator CRICHTON-BROWNE —I note the comments made in the Gutman gold tax inquiry, an inquiry which recommended the retention of section 23(pa) as a cost-effective encouragement to exploration. Gutman also indicated that no cost estimates had been made of the income foregone under section 23(pa) but he said that it did not appear to be substantial. Only 1,000 taxpayers received exemptions under section 23(pa) in 1984-85; only a small proportion-some 5 per cent of the exemptions under section 23 (pa)-related to mining for metals other than gold. It is obvious that the complete restitution of section 23(pa) would not be costly to the Commonwealth. As Gutman indicated, it is a valuable stimulus to the smaller prospectors in the mining industry. Such a change, in my view, ought to be made.

Let me return to the first part of my speech. It is obvious that the capital gains tax is having ramifications far beyond the picture the Government has chosen to paint for us. It is threatening capital raising and not just catching speculative profits as such. It is a threat to the mining industry. I conclude by saying that I earnestly ask the Government to seek to inquire into the interpretations that I have placed upon the removal of section 25a after 19 September 1985 and the effect that that is having on section 23(pa). The ultimate effect of the amalgamation of those two proposals would simply mean that from now on the sale the sale of mining tenement by prospectors for metals or minerals, defined and described in the section, are now subject to a capital gains tax which, I understood from the Minister at the time, was not the intention, thrust or purpose of the legislation.

As I pointed out, and as Gutman pointed out, that is a very small section in terms of numbers of people, and the amount of revenue to the Government is insignificant but it is having a burdening effect of removing the stimulus for exploration of those metals and minerals which are defined in section 23(pa). I earnestly ask the Government to reconsider its position to ensure that section 23(pa) and section 25a are reinstated in their original status so we can create the stimulus for exploration in mining in those areas in the same way that we have seen enormous stimulus because of the lifting of the threat of a tax on gold.