The Critical Minerals Production Tax Incentive: what to expect from the Bill

Additional details now set out in the Bill

Schedule 2 of the Bill seeks to establish the CMPTI tax offset.

The CMPTI tax offset will be available to certain companies that incur expenditure on processing activities which transform feedstock containing critical minerals into purer or more refined forms.

The amount of the tax offset will generally equal 10% of the eligible CMPTI expenditure incurred by the company for the income year. There is no proposed cap on the quantum of the tax offset claimable for each facility and no proposed restriction on the end use of the critical mineral.

A company will be eligible for the CMPTI tax offset if it meets the following requirements.

1. Company requirements

Constitutional Corporation: The entity must be a company to which section 51(xx) of the Constitution applies, or a body corporate incorporated in a Territory. The explanatory memorandum to the Bill (EM) suggests this will include a qualifying company that participates in the relevant activity through an unincorporated joint venture, and a head entity of a consolidated group where a qualifying company is a member of that group.
Residency: The company must, at all times during the income year in which its registered processing activities are carried on, be:
- an Australian tax resident, or
- a foreign resident carrying on the activity through a permanent establishment in Australia,

and, in each case, the company must have an ABN.

Income subject to tax: The company must not be an exempt entity.
Compliance with community benefit rules: The company must comply with any rules made that have regard to the community benefit principles. The rules will be implemented by way of legislative instrument. Non-compliance with certain rules may result in a reduction of the amount of the company’s tax offset rather than preventing the company from being entitled to the tax offset.

2. Time requirements

Income years: The CMPTI tax offset is available for income years starting on or after 1 July 2027 and ending on before 30 June 2040.
10-year duration: The CMPTI is available for a period of up to 10 consecutive income years beginning at the start of the income year in which the company makes the application for registration of a CMPTI processing activity, or the start of a later income year.

3. Activity requirements

A company must have one or more CMPTI processing activities in respect of critical minerals. The Bill includes a list of what is a critical mineral and provides for regulations to add to the list.

The company must register the CPMTI processing activity with the Secretary of the Industry Department (Industry Secretary). The Industry Secretary must be satisfied of the following requirements:

Processed at one or more facilities in Australia: The processing of the critical minerals must occur at a physical facility located in Australia.
Substantial transformation or prescribed by regulations: The processing activities must:
- Involve the substantial transformation of a feedstock containing a critical mineral through metallurgical processing into a purer or more refined form of the critical mineral, and a substantial purpose for carrying on the activity is to achieve this transformation. There is no purity condition, but the output must be chemically distinct from the feedstock; or
- Relate to critical minerals, is of a kind and produces an outcome of a kind prescribed by the regulations, and a substantial purpose for carrying on the activity is to achieve this prescribe outcome

Excluded activities: A processing activity will not be a CMPTI processing activity if it relates to, for example, mining, beneficiation and certain manufacturing activities.

There are several ongoing compliance requirements once an activity has been registered with the Industry Secretary. This includes furnishing an annual report for an income year about a registered CMPTI processing activity (for example, information about the outputs for the activity for the income year, and other information prescribed by regulations). A failure to provide such a report can result in an automatic revocation of the registration. The Industry Secretary is also empowered to revoke a registration for other reasons, including if the registration was obtained by fraud.

4. Expenditure requirements

CMPTI expenditure is expenditure incurred by a company in carrying on one or more of the company’s registered CMPTI processing activities for the income year at facilities specified in the certificates of registration for those activities. If the expenditure is incurred on non-arm's length terms, or is made to an associate, there is a further requirement that the expenditure be paid during the income year.

The Bill includes an apportionment mechanism where, for example, the activities produce other non-critical outputs. Apportionment is also required where only part of expenditure relates to the carrying on of a registered CMPTI processing activity.

Several integrity rules are also included:

CMPTI expenditure incurred on non-arm's length terms or to associates which exceeds market value will be reduced to the rate that would apply if the expenditure was incurred at market value
CMPTI expenditure that reflects intra-group mark-ups is required to be calculated based on the actual cost of the relevant group entity that provides the goods or services
an anti-overlap provision is included to ensure that multiple entities cannot obtain offsets in respect of the same CMPTI processing activity, where one entity pays another to carry on the activity.

Expenditure must also not be ‘excluded expenditure’, being expenditure:

that is capital or of a capital nature
that is taken into account when calculating the decline in value of an asset for tax depreciation purposes
on financing activities
on feedstock, whether raw materials or intermediate outputs from a previous processing step
that would result in more than 10% of the company’s CMPTI expenditure for the income year being incurred on or in relation to intellectual property
prescribed by the regulations.

Continuing areas of uncertainty …

During the public consultation period, we flagged here some key areas for further consideration to ensure the CMPTI tax offset was appropriately directed to industries and mineral products where it was most likely to have the intended impact. The Bill has addressed some areas of uncertainty, yet creates others.

Community benefit rules that have regard to the community benefit principles

The major area of uncertainty regarding the CMPTI tax offset continues to be the application of the community benefit principles to this support.

As flagged previously, there were a number of unanswered questions in respect of how the community benefit principles would apply in the context of the CMPTI, particularly in relation to how, and when, entities wanting to receive the incentives must satisfy the community benefit principles.

Now that the Bill has been introduced into Parliament, we make the following observations:

Additional risks posed by codifying community benefit rules in law: The decision to implement the CMPTI community benefit rules by legislative instrument, and the relative ease with which such rules may be amended or repealed, poses an additional risk for taxpayers wishing to take advantage of the CMPTI. This is particularly acute in the context of projects that will take years to develop and will require large long-term commitments of capital.
Which expert bodies will confirm that activities meet certain requirements – and when? The rules will specify conditions, such as compliance with community benefit principles and expert certification, that a company must meet to be entitled to the CMPTI tax offset for the income year. The EM states that it is anticipated the rules may require entities to arrange for certification by “expert bodies” that their activities meet certain requirements (with the ATO needing to confirm the fact of such certification). It remains unclear who those expert bodies will be that will assess compliance with the rules implementing the community benefit principles, and when that certification will be required to take place each year (for example, within 30 days of the start, or end, of an income year).

As previously mentioned, there may be some challenges:

linking the community benefit principles to a tax measure such as the CMPTI tax offset
measuring whether the CMPTI community benefit rules have been met, and
assessing whether a company is eligible for the full 10% offset or a reduced amount.

In the absence of certainty about the matters above (and other related matters), there is a question as to whether the CMPTI tax offset will achieve its intended purpose.

Annual reporting requirements

The Bill includes annual reporting obligations for taxpayers to be entitled to the CMPTI tax offset (see above) in a manner similar to the pre-existing reporting framework for research and development tax offsets. This reporting framework may be the ‘transparency and disclosure reporting requirement[s]’ flagged in the consultation paper. The Bill does not specifically include reporting requirements associated with tax compliance, which was also raised during the public consultation. However, it is possible that this will be provided as part of the CMPTI community benefit rules.

CMPTI processing activity

The offset will apply to a processing activity that gives rise to a ‘substantial transformation’ of a feedstock containing a critical mineral into a purer or more refined form that is chemically distinct from the feedstock. This reflects submissions during the public consultation and represents a departure from some of the more stringent proposals raised in the consultation paper, including the need to achieve specified purity levels. Outputs will now be defined through a test that will be principally based on the processing activities undertaken, such as extractive metallurgical processing techniques, as opposed to eligibility based on the purity of the output. Therefore, a broader array of activities may qualify for the offset.

However, there is little guidance on what a ‘substantial transformation’ means in practice. The EM provides one example concerning a process that transforms lithium ore, but which does not result in a change in the proportion of lithium in the output, such that no substantial transformation has occurred. Based on this example, the ‘substantial transformation’ test appears to be, in effect, a form of purity test. The EM also provides that:

whether a transformation of a feedstock to an output is a substantial transformation needs to be considered in the specific metallurgical and commercial context, and
a process that simply results in an incremental one per cent increase in purity of a low purity feedstock would be unlikely to constitute a substantial transformation.

Otherwise, the Bill and the EM is silent on this requirement.

As an alternative to the substantial transformation requirement, the Bill leaves open the possibility for regulations to cover other processing activities relating to critical minerals that produce a prescribed outcome, or to specify rules that require a level of technical detail given the nature of the mineral in question. This approach is broadly consistent with what was proposed in the public consultation. The ability to accommodate the variety of processing activities that can occur in relation to critical minerals (but which might not meet the general definition) should be viewed positively. However, the suggestion that special rules might be required for certain minerals, without indicating what those minerals might be, creates uncertainty for taxpayers.

Further, it must be the case that a substantial purpose for carrying on the relevant processing activity is to achieve the transformation or prescribed outcome. The EM provides that this does not have to be the sole or dominant purpose for carrying out the processing activity. Instead, the term ‘substantial’ is used in its relative sense and is intended to signify something that is real or of substance. That is, the actual outcomes of the processing activity and their significance for the company must be examined to determine if achieving the transformation or outcome is a substantial purpose. Having regard to the recent High Court decision in Automotive Invest Pty Limited v Commissioner of Taxation [2024] HCA 36, there is also a question as to how ‘purpose’ should be ascertained – is it the taxpayer’s subjective purpose, or an objective reasonable person purpose?

Eligible facilities expanded

Pleasingly, and in response to submissions during the public consultation, there is no longer a requirement for a final investment decision (FID) to be made, or production to have commenced, by 30 June 2030. The removal of this requirement means the CMPTI tax offset will not favour existing producers or those well advanced towards FID. As a result, it will support the Government in achieving its objective to build sovereign capability by providing as many processors as possible with access to the CMPTI tax offset.

CMPTI expenditure largely consistent

The position taken in the Bill with respect to what comprises CMPTI expenditure is largely consistent with what was indicated in the consultation paper. CMPTI expenditure excludes, amongst other things, costs for raw materials, financing, and costs relating to the decline in value of assets (i.e. capital works on buildings and structural improvements and tax depreciation). Therefore, less than 100% of the total costs of producing the downstream product will be included in calculating the tax offset. It is possible that the narrow range of eligible expenditure represents a compromise in return for the non-inclusion in the Bill of any requirement as to the purity levels of the output. However, as noted above, it is possible that regulations may subsequently be made that prescribe such purity levels.

Further, the position taken is considerably narrower than the United States’ Advanced Manufacturing Production Credit, which proposes to take into account depreciation and amortisation (being costs attributable to the production of an applicable critical mineral) as costs incurred in producing the applicable critical mineral.

Apportionment of expenditure potentially required

Apportionment of expenditure will be required in some circumstances. This includes where registered CMPTI processing activities result in outputs that do not contain a purer, or more refined form, of any critical mineral (non-critical output), where the non-critical outputs are not waste and are disposed of for value, in a non-arm’s length dealing with another entity, or to an associate. The Bill requires that this apportionment is done with reference to the amount of expenditure that is “reasonably attributable” to the non-critical output. The EM notes that this will usually require consideration of the significance of each output to the expenditure being incurred.

Apportionment will also be required where a loss or outgoing is incurred where only part of the loss or ongoing relates to the carrying on of a registered CMPTI processing activity. This includes where part of an amount of expenditure may be CMPTI expenditure and the rest is excluded expenditure. Again, apportionment between the different activities must be “reasonable” in the circumstances.

It’s likely that there may be more than one appropriate methodology to undertake any required apportionments, and public guidance from the Commissioner on the ATO’s approach to this requirement would be welcome.

Other related amendments

Part IVA

The Bill amends the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 to ensure that the CMPTI tax offset (and the HPTI tax offset) is a ‘tax benefit’ to which Part IVA can apply. In practice, the status of the incentive as a refundable tax offset (thereby limiting trafficking and arbitrage opportunities) as well as, amongst other things, the need for external registrations and public reporting, suggests that Part IVA should rarely be enlivened in respect of the CMPTI tax offset.

Shortfall Interest Charge

The Bill also includes amendments to address a technical issue with shortfall interest charge (SIC). These amendments will provide that if an assessment of an entity’s tax liability is amended and, as a result, the entity’s entitlement to a tax offset is reduced, the entity is liable to pay SIC on the excessive amount of the tax offset it received. The amendments will apply to all tax offsets and not just the CMPTI tax offset (and the HPTI tax offset).

Public reporting of information about the tax offsets

The Commissioner will be required to publicly report specified information about a company if the company is entitled to the CMPTI tax offset for an income year. This will include the amount of the company’s CMPTI tax offset for the income year.

Limitation periods

There may be circumstances where a company’s eligibility for a CMPTI tax offset changes. Therefore, amendments will be made to ensure that the Commissioner is not prevented from amending an assessment of a company where the registration of a CMPTI processing activity is transferred, varied, suspended or revoked.

Practically, this means the ordinary four year limitation period for amendments to company tax returns will not apply in the above circumstances.