Feasibility expenditure – how the law applies

Tax Alert - March 2017

By Robyn Walker

Feasibility has been a regular feature of our Tax Alert articles for a few years now.  From the time Inland Revenue first started consulting on the deductibility of feasibility expenditure way back in 2004, to when the original interpretation statement (IS 08/02) was released in 2008, through to the Trustpower judgments of the High Court (2013 [1]), Court of Appeal (2015 [2]) and Supreme Court (2016 [3]) there has been a lot of thought given to how this expenditure should be treated.

Following the Supreme Court decision in July 2016, we commended Inland Revenue for quickly rethinking IS 08/02 in light of that verdict and producing a draft revised interpretation statement in September 2016.  Submissions were taken and we now have a finalised position from Inland Revenue on the topic: “IS 17/01: Income tax - deductibility of feasibility expenditure”.

Helpfully for taxpayers, having this statement released in February does give those taxpayers still working on their 2016 tax returns a little bit of time to ensure they are taking tax positions consistent with Inland Revenue’s interpretation of the law.

The finalised statement is not materially different from the draft version released last September (refer our previous Alert article).  The key test in paragraph 129 of IS 17/01 is (emphasis added):

“Therefore, in the Commissioner’s view, expenditure is likely to be deductible in accordance with the Supreme Court decision if it is of a type incurred on a recurrent basis as a normal incident of the taxpayer’s business and it satisfies one of the following:

  • the expenditure is not directed towards a specific capital project; or
  • if the expenditure is directed towards a specific capital project, the expenditure is so preliminary as not to be directed towards materially advancing a specific capital project – or, put another way, the expenditure is not directed towards making tangible progress on a specific capital project.”

There have been some tweaks to the draft.  For example, Inland Revenue have sought to clarify that an amount will be capital as long as the expenditure was intended to achieve either material advancement or tangible progress, it is not necessary for the expenditure to meet both these tests (although they often would).

The final statement also brings in a new concept of the expenditure being incurred on a recurrent basis. IS 17/01 states:

“The Supreme Court also found that, in some circumstances, expenditure associated with early stage feasibility assessments could be seen as a normal incident of business (at [72]).  The Court was considering this in the context of Trustpower’s fact situation.  The nature of Trustpower’s business was such that it was regularly exploring new generation possibilities.  In this regard, incurring feasibility expenditure was a normal incident of its business.  It is not clear that the Supreme Court would have been as willing to find that preliminary expenditure could be deductible if the expenditure in question related to a one-off capital expansion for example.  Consequently, the focus of this statement is feasibility expenditure that is (or will be) incurred on a recurrent basis by a taxpayer as an ordinary incident of its business.  It is possible that feasibility expenditure that is not incurred on a recurrent basis could be deductible in some circumstances.  However, this statement does not consider these situations.”

The decision to restrict the interpretation statement to types of expenditure which are recurrent in nature may frustrate some, but it does provide a link back into classic capital/revenue tests which have been being applied for many years [4].

IS 17/01 retains the length of its predecessor, however it has a new added feature of a flow chart to help easily step taxpayers through the tests.

So is this the last word on feasibility? Not likely. While IS 17/01 provides a useful summary of the law following the Supreme Court decision in Trustpower, the law just isn’t that great for taxpayers looking to innovate and grow.  Fortunately the Tax Policy Work Programme has policy work underway to reform the law in this area.  In our view, it can’t come soon enough.

For more advice on how IS 17/01 applies to your feasibility expenditure please contact your usual Deloitte Advisor.


Feasibility chart

[1] Trustpower Ltd v CIR [2013] NZHC 2,970

[2] CIR v Trustpower Ltd [2015] NZCA 253

[3] Trustpower Ltd v CIR [2016] NZSC 91

[4] See BP Australia Ltd v FCT [1965] 3 All ER 209

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