SA Mines and Energy Journal : June 2009
JUNE/JULY 2009 SA MINES & ENERGY JOURNAL 22 OPINION Payneham Financial Services LTD PTY KEY PERSON INSURANCE & SUPERANNUATION SPECIALISTS KEY PERSON INSURANCE A funding mechanism which insures the value of key people to a business. Key person insurance provides money for capital/debt or revenue purposes in the event of death, critical illness or permanent and total disablement to the person insured. SUPERANNUATION A easy way to reduce tax and grow money for your retirement. Superannuation and life insurance are a tax effective dynamic duo. TRANSITION TO RETIREMENT (TTR) PENSIONS For people who are at age 60, a TTR pension can enable you to turn your super into a tax free investment zone, receive a tax free pension and keep working. A TTR pension can also be accessed at age 55, the only difference is the pension income is concessionally taxed until age 60. ABOUT PAYNEHAM FINANCIAL SERVICES We provide personal service and advice to help people & companies protect and grow their financial position. Important Information: Des Tsagatos of Payneham Financial Services Pty Ltd is an Authorised Representative of Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. This information is of general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives.You should obtain professional advice before acting on the information contained in this publication. Des Tsagatos Dip FP CFP Payneham Financial Services Pty Ltd, 69 Portrush Rd Payneham SA 5070 Ph: 8362 2626 There is a bizarre anomaly in the Australian taxation system that no one likes to talk about. Although mining exploration activity is recognised as creating a tax deduction, the majority of companies engaged in exploration are unable to realise the benefit of that deduction. In the midst of the recent boom, this was an unwelcome hurdle for junior explorers. In the midst of the current global economic downturn, in a competitive environment for investment dollars -- either debt or equity derived -- this anomaly places the entire exploration sector into a deep freeze. Junior explorers account for around 80 per cent of all resource companies listed on the ASX, and are responsible for most new discoveries. They are the incubation room of the Australian minerals sector. These companies are predominantly involved in mineral exploration as opposed to production. To be classified as a junior company, a company must have a market capitalisation of less than $200 million; a majority actually have a capitalisation of less than $30 million. As junior exploration companies generally have no assessable income for tax purposes, they are unable to claim a tax deduction for their high-risk exploration activities. The after-tax net present value of exploration projects is reduced, and indeed, may become negative. Accordingly, an inability to deduct exploration costs makes it difficult for junior companies to obtain external exploration finance. Canada, another significant mining nation, long ago identified the anomaly in its own tax system and instigated a scheme whereby the tax deduction that could not be claimed by juniors could be passed through to shareholders. This made it significantly easier for junior explorers to raise finance in Canada, and ensured that this market failure in the lopsided operation of the existing deduction was corrected. A version of such a flow-through share scheme has been in operation since the 1970s, and since 2000 there has been a nationwide flow-through share scheme offering investors a further 15 per cent increase in their deduction. Meanwhile, successive Australian governments have vacillated about the scheme for over two decades, on one hand recognising the obvious logic and benefits of the scheme, but reluctant to commit budget spend to a sector seen as subject to successive boom and bust cycles. Ironically, the cyclical nature of the mining industry, coupled with the lag time between exploration discovery and new mines, creates an additional imperative to ensure barriers to sustained investment in exploration are removed. That is, junior explorers particularly suffer with the downturn and by the time commodity prices pick up, a dearth of mineable deposits can hinder development of the industry. In the current climate of a restricted financial market, the higher risk junior exploration sector has been gutted. New IPO listings from junior explorers have declined more than 75 per cent since September last year and exploration activity for many companies has been frozen, with massive job losses across the industry. Those who have lost their livelihood include geologists, the drillers, camp caterers, transport drivers, service providers of all sorts, and non-industry locals in many mining communities. These losses are only the start. They do not include the thousands who will not be employed during the next 30 to 40 years, as mining companies move offshore to countries such as Canada which have recognised and addressed this market failure. And then there are the hundreds of thousands workers, indirectly employed in a range of supporting services including construction, catering, equipment manufacture, engineering consultancy, maintenance contracts and transport that stood to benefit from an export industry worth more than $100 billion a year. The Federal Government committed to implementing a flow-through share scheme as part of its 2007 election platform, but appears to have reneged on that commitment in response to the current economic climate. Yet it is this very context that has made the flow-through share scheme so critical to junior explorers, in order that they are able to compete equally with alternative investments and jurisdictions, raise capital and remain active. We urge the Government to do the smart thing and honour its commitment to address the tax system anomaly and thereby rectify this pressing long term market failure. This will provide direct stimulus to the economy, with a potentially greater impact on direct employment and private and public sector revenues than any other stimulus measure to date. And it will ensure that all Australians will continue to reap the future windfall benefits provided by our most lucrative, yet most volatile, export industry. Stuck in a deep freeze An Australian tax anomaly creates major problems for junior explorers, writes Greg Chalmers, the president of the Australasian Institute of Mining and Metallurgy of Jellinbah Resources.
April May 2009