Understanding the future made in Australia Bill 2024: Tax incentives for critical minerals and hydrogen production

The Future Made in Australia (Production Tax Credits and Other Measures) Bill 2024 (Bill), through which the Critical Minerals Production Tax Incentive (CMPTI) and Hydrogen Production Tax Incentive (HPTI) are proposed to be enacted, has been introduced into Federal Parliament and is currently being considered by the Senate Economics Legislation Committee (Committee).

Background

The CMPTI and HPTI (collectively, the Incentives) are arguably the centrepiece of the Federal Government’s Future Made in Australia Plan (Plan), which was announced as part of the 2024-25 Federal Budget^[1], and is directed towards maximising the economic and industrial benefits of Australia’s transition to net zero. 

Whereas the CMPTI is proposed as a refundable tax offset equal to 10% of an eligible company’s eligible CMPTI expenditure, the HPTI is proposed as a refundable tax offset available to eligible companies at the rate of $2 per kilogram of eligible hydrogen produced. The Incentives are designed to encourage the investment in onshore minerals processing and renewable hydrogen production that is required for Australia to achieve its ambition of becoming a world leader in renewable energy. 

Incentives

Eligibility for both Incentives is limited to entities that are:

• ‘Constitutional corporations’ as defined by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) – i.e., most companies, thereby excluding other entities such as trusts;
• Subject to income tax in Australia on income earned from the activities giving rise to the Incentives, where the entity has taxable income; and
• Compliant with yet-to-be-made rules implementing the community benefit principles for the Incentives, which are enumerated under subsection 10(3) of the Future Made in Australia Bill 2024^[2] that was recently passed by Federal Parliament and were established to ensure public investment and the private investment it attracts flows to communities in ways that benefit local workers and businesses^[3]. 

Further, both Incentives will be applicable to income years starting on or after 1 July 2027 and ending on or before 30 June 2040 and are restricted to a maximum consecutive 10-year period.  Both Incentives are also potentially subject to reduction in the event of non-compliance with the pending rules implementing the community benefit principles. 

No cap applies to the amount of refundable tax offset an eligible company may access under either of the Incentives. 

CMPTI 

The CMPTI, which like the R&D Tax Incentive will be jointly administered by the Australian Taxation Office (ATO) and Department of Industry, Science and Resources (DISR), is conceptually similar to the section 45X tax credit available in the United States (insofar as the section 45X tax credit applies to critical minerals), although the section 45X tax credits has materially broader application, applying generally to costs of extracting, acquiring, processing, purifying, refining, and converting critical minerals and electrode active materials^[4]. In addition to satisfying the abovementioned common criteria, to be eligible for the CMPTI:

• The expenditure must be incurred in carrying on one or more ‘CMPTI processing activity’ involving a ‘critical mineral’ that is registered with DISR - defined by proposed subsection 419-20(1) of the ITAA 1997 to broadly mean an activity carried on at one or more facilities in Australia with a substantial purpose of transforming a feedstock containing a critical mineral into a purer or more refined form of the critical mineral that is chemically distinct from the feedstock, or achieving a prescribed outcome;
• The expenditure must not be ‘excluded expenditure’ (e.g., expenditure of capital nature, depreciation, financing costs, the cost of feedstock, as well as expenditure on IP to the extent such expenditure constitutes more than 10% of the eligible company’s CMPTI expenditure for the income year); and
• The expenditure must not be on an ‘excluded activity’ (e.g., mining, beneficiation, or manufacturing).

The specific definition of ‘CMPTI processing activity’, together with the breadth and nature of the respective definitions of ‘excluded expenditure’ and ‘excluded activity’ restrict the CMPTI to the ongoing and scalable expenditure of processing activity that increases the supply and export of value-added critical minerals (e.g., energy, labour, maintenance, and reagents/other consumables), although the exclusion of depreciation on assets used to process critical minerals in particular (as well as financing costs) may detract from the efficacy of the CMPTI by failing to incentivise a material part of the cost of undertaking the value-added processing activities the CMPTI seeks to encourage. 

Structurally, the CMPTI rules bear various similarities to the R&D Tax Incentive rules contained in Division 355 of the ITAA 1997, including, in addition to their abovementioned joint administration by the ATO and DISR:

• Integrity rules such as those reducing a company’s eligible CMPTI expenditure to reflect intra-group mark-ups and requiring that relevant expenditure incurred to an associate must be ‘paid’ before it becomes eligible CMPTI expenditure; and
• An obligation of the Commissioner of Taxation (Commissioner) to publicly report on an annual basis prescribed information regarding CMPTI claimants, based on the equivalent R&D Tax Incentive regime contained in section 3H of the Taxation Administration Act 1953 (TAA).

Additionally, based on the current drafting of the Bill, entitlement to the CMPTI will not affect an eligible company’s ability to deduct eligible CMPTI expenditure for income tax purposes. This mirrors the Digital Games Tax Offset rules contained in Division 378 of the ITAA 1997. 

It is noted, for completeness, that the term ‘critical mineral’ derives its meaning from the Critical Minerals List per DISR’s website as at 14 May 2024 and will not automatically vary in accordance with any updates to that Critical Minerals List, although there is a power for regulations to prescribe other minerals as ‘critical minerals’ for the purposes of the CMPTI. Please refer to the Appendix to this Tax Insight for the relevant Critical Minerals List. 

HPTI

The Federal Government has proposed the HPTI to ‘open the door to green metals’, which are critical to industrial decarbonisation and are expected to play a critical role in Australia’s transition to net zero. 

In addition to satisfying the abovementioned common criteria, to be eligible for the HPTI:

The hydrogen must be produced in Australia from renewable sources or processes with a production emissions intensity not exceeding 0.6kg of carbon dioxide per kilogram;

• The hydrogen must be registered as eligible with the Clean Energy Regulator (CER), including that the production profile in relation to the facility satisfies various requirements, such as having a minimum production capacity equivalent to the capacity of an electrolyser with a 10MW nameplate capacity; 
• A final investment decision must have been made in relation to the facility before 1 July 2030. 
• Various other eligibility requirements of a more technical nature apply, including the absence of a correction notice with respect to the relevant registration with the CER. 

RSM View

The Incentives, which are anticipated to come at a cost of close to $14 billion over the relevant forecast period, represent a milestone in the Federal Government’s implementation of the Plan, and should be welcomed by industry participants as well as the public at large. Although a couple of years remain until their effective date, companies are encouraged to ensure they adequately prepare themselves for the implementation of these watershed incentives. 

Submissions to the Committee close on 9 January 2025, with a final report due to be finalised by 30 January 2025.  The Senate is scheduled to sit in the first two weeks of February 2025, which may be the final sittings ahead of the 2025 Federal Election.  It will be intriguing to monitor the progression of the Bill in the lead up to the Federal Election.

FOR MORE INFORMATION

RSM’s Tax Services team is well-equipped to assist in this regard. For any questions or further assistance, please contact your local RSM Adviser.

[1] Investing in a Future Made in Australia | Budget 2024–25 

[2] Future Made in Australia Bill 2024 

[3] Although the Incentives are provided through the tax system rather than being a spending initiative, they have been designed with regard to the community benefit principles to ensure symmetry between the Incentives and relevant spending initiatives. 

[4] IRS and Treasury issue final section 45X regulations