Lowering the cost of funds for exploration: the case for tax-based equity financing incentives
Kenneth WeeDeloitte, Level 9, Brookfield Place – Tower 2, 123 St Georges Terrace, Perth WA 6000, Australia. Email: kwee@deloitte.com.au
The APPEA Journal 60(2) 569-572 https://doi.org/10.1071/AJ19184
Accepted: 28 February 2020 Published: 15 May 2020
Abstract
Exploring for, and discovering, new oil and gas resources is essential to an oil and gas company’s ability to replenish and enhance its reserves base. With rising future demand for clean, sustainable and affordable energy sources and the important role and contribution of the Australian petroleum industry in the evolving global energy mix, continual investment in exploration activity will be the key to unlocking the prospectivity of undeveloped acreage, particularly in frontier areas. However, exploration is inherently risky and costly. Companies constantly compete for scarce capital to provide the necessary funding to undertake exploration activities. Financial capacity underwrites the ability to bid for exploration acreage by offering commensurate work program commitments. For junior explorers in the early exploration stage, liquidity constraints can mean that the covenants, collateral security requirements and periodic servicing obligations associated with raising debt financing are prohibitive. Equity investors, on the other hand, typically demand a higher return on capital. A fresh policy approach to encouraging petroleum exploration in Australia should be considered by government to incentivise the providers of equity capital to risk money for exploration ventures. This paper considers three models that are used internationally: (1) flow-through shares, (2) worthless stock deductions and (3) notional interest deductions for equity financing. This paper provides a comparative in-principle analysis of each model and offers some suggestions on how these models may be adapted to an Australian context and embedded into the existing taxation system.
Keywords: flow-through shares, income tax, notional interest deduction, worthless stock deduction.
Kenneth Wee is a Principal in the Business Tax division of Deloitte’s Perth office and specialises in providing advice on Australian corporate tax and Petroleum Resource Rent Tax to clients in the oil and gas industry. He holds a Bachelor of Commerce degree and is both a chartered accountant and chartered tax adviser, with more than 18 years’ experience. Kenneth’s expertise encompasses advising on corporate and international tax, restructures, mergers and acquisitions, and financing and capital management matters. He has also worked extensively in the areas of tax audits/reviews, rulings, tax law policy and design advocacy, and managing tax controversies and disputes. |
References
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