Feasibility issues no more?
Tax Alert - April 2021
By Robyn Walker
The saga that has been the tax deductibility of “feasibility expenditure” has been going on for more than the four-year time bar, and more than the seven-year record keeping requirement. Now we can say that the issue is mostly put to bed with the passing of the most recent tax legislation; however, there are still some unresolved issues meaning this may not be the last word on this topic.
Most people familiar with tax will know what is meant by “feasibility expenditure”, but those needing a history lesson can refer to one of our earlier articles.
The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Act 2021 contains new laws which will allow much of the feasibility expenditure, previously classed as “black hole expenditure”, to be tax deductible spread over five years. There is a de minimus rule will allow an immediate deduction if total qualifying expenditure is less than $10,000 even if a project is not abandoned. The new rules apply to expenditure incurred after the 2019-20 income year.
Like all tax rules, there are some in’s and out’s to be aware of. For example, if the feasibility expenditure relates to buying a business, the rules will not apply if the project is related to acquiring shares in the target company rather than its assets. Similarly, there is no ability to “game” the tax system by abandoning a project, claiming the deductions over five years, and then completing the project. In the event that a taxpayer abandons a project and then “subsequently completes or creates the property, or acquires the property or similar property”, then the full amount of total deductions previously claimed under the five-year spreading rule becomes income. Taxpayers will need to monitor whether a project has been reinstated for seven years – this may be more relevant when a project was abandoned for a reason which may change; for example, a project was technically possible, but it was not financially feasible at the time.
The rules also require that the “general permission” is first satisfied in relation to the project. What this means, is that the expenditure needs to have a nexus to either deriving income or it must be incurred in carrying on a business. In practical terms, if the feasibility expenditure relates to something with an insufficient connection to your existing business/income sources, the rules won’t apply. Inland Revenue illustrates this in its Interpretation Statement on Feasibility Expenditure with an example of a saw-milling business which wants to start producing garden tools – the conclusion being that the expenditure investigating a garden tool business does not satisfy the general permission. While there is no solution to this problem in this legislation, the issue is being considered for inclusion in the next Tax Policy Work Programme. Perhaps, this is something to bear in mind if you have or are contemplating “pivoting” your business in order to survive the current business environment.
The flowchart illustrates some of the key points to be aware of when applying the new rules.
For more information please contact your usual Deloitte advisor.
April Tax Alert contents
- Changes to the property tax landscape
- Latest tax legislation solves some problems you didn’t know you had
- Feasibility issues no more?
- OMG my tax return is wrong
- Is tax pooling still relevant for managing your tax payments?
- Recapping Deloitte’s FBT and employment taxes webinar – key things you need to know under the 39% rate
- Snapshot of recent developments