The Australian Institute of Geoscientists (AIG) has revealed deep concerns about the ramifications for exploration activity in Australia in regards to the Government’s proposed changes to Australian taxation law as it impacts the broader resources sector. The Institute argues that exploration already suffers from significant volatility, cyclical activity and short-term market pressures, with a profound effect on not only the sustainability of Australia’s mining industry but also employment and career development opportunities for geoscientists – and the appeal of geoscience as a career.

The ALP went to the 2007 Federal election promising to introduce, in the current term, a flow through share (FTS) scheme but, through the Henry Review and machinations of the resource tax proposals since, has failed to do so – leaving ongoing and unresolved problems.

AIG argues that the Australian Government’s resources tax decisions neglect the entire, upstream, discovery side of the exploration equation whilst obtaining greater returns from the ,downstream, extraction side. Most of Australia’s recent minerals boom in iron ore, alumina, nickel and base metals has been built on discoveries made decades ago, but these major deposits are now, largely, mature and in decline – a clear threat to long term mine production and hence national export earnings.

AIG believes that only a sustainable level of resource exploration can deliver Australia more, long term, mines. In addition, they blame the Government for falling prone to unrealisable estimates and erroneously optimistic views of resource industry sustainability as government agencies have included resources with the lowest level of industry confidence.

AIG’s recent report investigating “Market Failure in the Australian Mineral Exploration Industry: The Case for Fiscal Incentives”, finds that the heavy reliance of companies exploring in Australia on short term market capital has impeded their ability to undertake high risk but potentially high reward greenfields or grassroots exploration capable of yielding the new major discoveries.

In AIG’s view Australia’s tax regime for mining companies continues to offer no incentives, concessions or support for investments in greenfields exploration by companies that do not already have producing mines generating cashflows against which exploration expenditure may be fully offset for taxation purposes.

AIG disregards measures designed with multinational companies in mind – as companies that undertake little to no meaningful grassroots exploration within Australia are irrelevant to supporting and growing the Australian mining sectors. Instead they highlight the essential work by junior explorers, which now undertake the majority of metals exploration in Australia, as receiving no recognition under the current taxation system during the, often protracted, time it takes to discover a new deposit and turn it into a viable and sustainable mine.

The Institute pointed out that the current state of flux in mining taxation affords the Federal Government the opportunity to correct this market failure – and to begin the resuscitation of the exploration sector. In light of this AIG has urged the government introduce a FTS scheme, similar to that in Canada, which provides an exploration tax credit designed to flow through to shareholders in junior exploration companies.

AIG thinks that a FTS scheme would address the disparity whereby most junior explorers are ineligible for deductions for investment in exploration under the Income Tax Assessment Act simply because they do not generate any taxable income. A FTS would rectify this anomaly by allowing explorers that cannot use the deduction to enable tax credits to flow through to their shareholders, making these companies more attractive to investors and providing the exploration sector with greater and more sustained investment.

AIG calculated costs of not introducing an immediate FTS scheme into Australia include the slow destruction of Australia’s exploration pipeline resulting in degradation of resources base and suboptimal development of existing resources due to erosion of geoscientific capability. The Institute believes that it could even degrade Australia’s ability to effectively address geoscientific challenges beyond the resources sector, in fields as diverse as groundwater resource management, reversing land degradation, environmental remediation and even climate change science.