The proposed Critical Minerals Production Tax Incentive (CMPTI) announced with the Federal Budget for 2025 accounts for approximately $7 billion of the total $22.7 billion industry support package collectively known as the 'Future Made in Australia' initiative. It was, on the whole, warmly received by industry although, as we pointed out in our previous article , several features of the regime would likely limit its effectiveness in incentivising downstream processing of critical minerals in Australia.
Treasury has now released a consultation paper seeking input on some of the key design features for the legislation implementing the CMPTI.
Key elements of the CMPTI
The CMPTI will provide a production incentive valued at 10% of eligible expenditure for processing and refining of any the 31 minerals currently published on the Commonwealth Government’s Critical Minerals List through each eligible facility.
The incentive is about in relation to any eligible facility and will be applicable for up to 10 years per project, for production between 2027 - 28 and 2039 - 40 by projects that reach a final investment decision (FID) by 2030.
Treasury is seeking submissions on the following key design features of the CMPTI:
Who is eligible?
The CMPTI will be available to Australian resident companies or foreign resident companies carrying on business through a branch or office in Australia subject to Australian income tax throughout the relevant income year (a necessary design feature as the credit is being delivered through the tax system).
Comment: The proposed eligibility criteria clarify that the Australian tax-paying subsidiaries or branches of international conglomerates that currently have or intend to establish downstream operations in Australia will qualify. Although this feature has attracted some commentary, given the focus is on developing the downstream processing sector, it seems sensible not to impose a de facto foreign ownership restriction, on top of any other conditions which may be imposed as a consequence of Australia's foreign investment laws. Other entities such as partnerships or trusts will not be eligible. While likely to be uncommon, arguably there should be some basis for the corporate partners or unitholders to claim the offset on a look-through basis. An unincorporated joint venture where the parties are companies subject to Australian income tax may qualify (i.e. the companies would directly claim the offset).
What processing and refining costs are eligible expenditure?
Eligible expenditure will be defined in legislation and targeted at the direct costs of processing and refining the specific eligible mineral output (see below), including such things as reagents and other consumables, labour, utilities, maintenance, logistics and transport.
Comment: Given the cost of raw materials, depreciation and financing are excluded, depending on the commodity and process involved, the CMPTI may only offset a small proportion of the total costs of producing the downstream product. If a company has expenditure that relates to both the processing and refining of critical minerals and other resources (e.g. utilities, maintenance or logistics), there will need to be some basis for apportionment to determine the expenditure which relates to the offset. Integrity rules will also be required to normalise intra-group and related party transfers and assignment of costs. If these are based on transfer pricing principles, it will be necessary to benchmark terms to contracts with third parties, which may involve considerable ongoing compliance. These rules are likely to be complex to apply in practice, given the diversity of downstream operations themselves and the extent to which they may be integrated with upstream activities that are not eligible to benefit from the CMPTI.
What are the eligible outputs?
The Department of Industry, Science, and Resources (DISR) will develop a list of specific outputs resulting from the refinement and processing of the 31 relevant minerals within the scope of the CMPTI, and these will be subject to separate consultation with the sector to ensure their appropriateness.
Comment: It seems likely from the examples in the consultation document that processing beyond more concentration will be required. For example, the 5.5% or 6% LiO2 spodumene concentrate typically exported by Australian lithium miners would not be eligible, and it is not clear whether intermediate nickel products such as MHP would qualify (notwithstanding the role they may play in the battery supply chain). This will be an important aspect of future consultation.
What administrative arrangements should apply?
The CMPTI is likely to be co-administered by DISR and the ATO, with specialist input from Geoscience Australia.
Comment: These arrangements are designed to provide confidence that funds are being provided to support projects that are consistent with the Future Made in Australia policy. Given the technical characteristics of the legislation, this appears sensible.
What 'community benefit' principles should be reflected in the legislation
It is intended that the CMPTI, like all initiatives under the Future Made in Australia banner, will include so-called Community Benefit Principles which will focus on investment in local communities (including First Nations communities), domestic industry and supply chains, and skills, and the promotion of diverse workforces, secure jobs and tax transparency.
Comment: Treasury is seeking submissions on the appropriate framework to apply in securing community benefit outcomes. The Australian Industry Participation (AIP) Rules may be a useful reference, together with requirements in analogous legislation (eg relating to the Northern Australian Infrastructure Facility) requiring the preparation of an Indigenous Engagement Strategy. However, the government will need to balance the costs of any additional community benefit obligations against the revenue impact of the CMPTI.
Will the CMPTI achieve its objectives?
It is important to note that the CMPTI is, by deliberate design, an initiative to support the downstream processing of minerals beyond the mining stage: it is not intended to support mining or extraction activity. As we previously noted, the CMPTI therefore offers no relief to upstream miners faced with increasing costs and green and red tape. There may be indirect benefit to upstream producers to the extent the CMPTI supports the creation or maintenance of domestic processing capacity as an alternative to export markets, although it has to be said that access to markets has not been what has typically hampered the development of critical minerals projects in Australia.
The CMPTI also applies to existing as well as any new facilities that reach FID before 2030. There is no doubt that this will provide a useful fillip to existing or planned downstream production facilities for commodities such as nickel, lithium and rare earths Fortunately, despite some initial suggestions to the contrary, the CMPTI is not subject to an overall project cap, avoiding the possibility that it would be exhausted by existing producers before new capacity could be brought online.
Treasury has also confirmed that the CMPTI will operate as a refundable offset. Accordingly, depending on the circumstances of the entity claiming the CMPTI, the offset may result in a cash refund or a reduced income tax liability. This should allow the credit to be factored into an analysis of the free cash flow available for debt service in the analysis of the bankability of downstream projects.
The industry lobbied hard for the CMPTI, and there has been positive commentary from the major representative groups following the release of the budget. However, there are reasons to doubt whether the CMPTI will achieve a meaningful step change in the value-adding of critical minerals extracted in Australia:
first, in excluding depreciation, the CMPTI does not address what has typically been the most significant impediment to downstream processing in Australia, which is not operating costs per se, but high capital costs relative to other jurisdictions.
second, we query whether the 2030 deadline for FID is a necessary requirement, as it is likely too short for most greenfield critical minerals projects, given the timeline required to undertake technical studies, achieve market acceptance of the product and obtain the requisite environmental and other permits; and
third, sovereign risk remains a concern given the Opposition parties' rejection of the CMPTI. While criticism from the Coalition that the CMPTI amounts to “billions for billionaires” appears unfair, it would be disappointing if the Government could not develop a framework for support of the critical minerals industry that is capable of garnering bipartisan support, as have the central elements of the Inflation Reduction Act in the United States.
Conclusion
In one sense, any reduction in the tax burden on the critical minerals industry could be seen as a positive thing. However, as with all such initiatives, the real question is how to deliver public benefits of a value exceeding the indirect subsidy. The view that the CMPTI will predominantly benefit existing players, while failing to boost investment in additional downstream capacity and failing to assist those pre-reserve level explorers into FID and reduce the time and cost burdens and barriers, lies at the heart of most criticisms of the policy to date.
While the consultation document provides some useful clarifications, there are still many critical details to be worked out, and the final design of the CMPTI legislation will not be known for some time. The finalisation of these details provide the opportunity to ensure the incentive is directed to those industries and mineral products where the incentive is most likely to have the intended leveraged impact. It may also provide a pathway for bipartisan support at a Federal level, providing much-needed certainty for the industry.