‘Flow through share scheme essential to mining’

Excerpts from a statement issued by AusIMM president-elect, Greg Chalmers

 The rationale for a flow-through share scheme is to rectify a current anomaly in taxation law that adversely affects junior explorers. Currently, the Income Tax Assessment Act (ITAA) provides for a tax deduction for exploration expenditure, presumably on the basis of it being a high-risk activity with recognised benefits to the common economic good. However, junior exploration companies (which make up more than 70 per cent of companies engaged in mineral exploration within Australia) generally do not generate sufficient taxable income to be able to claim the deduction.

A flow-through share scheme would smooth out this anomaly by allowing companies which cannot use the deduction themselves to pass it through to shareholders, who are then able to use it to offset their own tax liabilities. Thus, a flow-through share scheme achieves twin objectives of rectifying a tax anomaly and increasing the attractiveness to investors of junior exploration companies (thereby providing those companies with the capital to maintain or increase their exploration activities).

It would also give Australia policy parity with Canada, which has had a successful flow-through share scheme in place since 2000. The effectiveness of the Canadian scheme can be seen by the fact that, within a year of its introduction, Canada displaced Australia as the second largest spender on exploration (by region).

A flow through share policy is now essential to the survival of an important part of Australia’s minerals sector. The primary market has become a very difficult place for raising exploration capital, and the shortage of capital has potentially devastating implications for junior exploration companies. Many companies have shelved their listing intentions because of volatility and a lack of investor support. In the nine months to 30 September, there were only 84 initial public offerings with a total market capitalisation of less than $2.3 billion. It is clear that the numbers for the full 2008 year will fall far short of the figures for 2007, which were 313 and $19.9 billion respectively.

The quantifiable losses across the short term – jobs, exploration spending and new IPOs – are significant. However what the bare statistics fail to capture are the longer term economic impacts – loss of talent and of geoscientific knowledge about Australia’s terrain, and loss of infrastructure.

These losses will directly impact upon our ability to restock Australia’s mineral inventory through exploration. Without forward looking and effective policy measures in the 2009-10 Budget, decisions that are made in the next 24 months could do irreversible damage to the economic sustainability of the minerals sector for decades to come.