Employee Allowances


Supreme Court delivers Trustpower decision

Tax Alert - August 2016

The Supreme Court delivered its decision in the case of Trustpower v Commissioner of Inland Revenue, and the answer was not what taxpayers were wanting to hear: “The appeal is dismissed.”

The Trustpower case has been through three courts, with the initial verdict in favour of the taxpayer and all subsequent appeals siding with the Commissioner, denying a deduction for the cost of resource consents needed to evaluate the feasibility of possible windfarm projects.  Our articles setting out the facts and analysis of the High Court and Court of Appeal decisions can be found here.

While the outcome will be disappointing to both Trustpower and the wider tax community, it’s not all bad news as the judgment does takes some steps to reverse some of the controversial aspects of the Court of Appeal decision.  The Court of Appeal decision was widely criticised as it took the position that expenditure analysing the feasibility of potential windfarm projects could essentially never be deductible, or only in very limited circumstances - as the expenditure did not satisfy the “general permission” (the tax legislation requires that there is a nexus between expenditure and the operation of the taxpayer’s business to derive income). The Supreme Court has rejected this proposition, which is very pleasing.  

While the judgment doesn’t completely close the door on feasibility expenditure being deductible, the Court indicates that only very preliminary expenditure may qualify.  The judgment notes: “As is apparent, we consider that some feasibility expenditure referable to proposed capital projects might sometimes be deducted. We do not, however, see such deductibility as extending to external costs incurred in respects which do, or were intended to, materially advance the capital project in question.”

This theme continues in the Court’s concluding comments: “The expenditure on obtaining resource consents in this case was directly related to specific projects that would be on capital account if they came to fruition. The projects could not proceed without resource consents. Obtaining the consents thus represented tangible progress towards their completion. The expenditure is thus on capital account and not deductible.” Emphasis is put on the fact there was “tangible progress” towards the completion of a project.  How taxpayers should determine if and the extent to which “tangible progress” has been made will be something Inland Revenue will need to urgently prepare some guidance on. This does appear to be based on an application of certain principles in another case (Milburn) in relation to resource consents, which arguably are not on all fours with Trustpower’s facts.

The judgment highlights the subjectivity that is inherent in applying the capital/revenue boundary, noting that it is not up to the courts to construct a test for determining the point in time when expenditure ceases to be deductible.  Although the role of a court is to decide the legal issue by reference to the facts before it, it would have been helpful for the highest court in New Zealand to articulate some general or guiding principles in this regard. The judgment also highlights that there is a degree of unfairness in the legislation, as there will be cases where no deduction at all is available to a taxpayer (this is referred to as “black hole” expenditure).  While subsequent to this case arising there has been law change to remove the possibility of black hole expenditure for certain resource consents, there is still a policy problem that businesses can suffer from this complete lack of immediate or over-time deductibility (and this will likely be more prevalent following this judgment).  This begs the question as whether there needs to be law reform – we say yes.

Inland Revenue has previously stated that it will continue to apply its previous interpretation statement on feasibility expenditure until this judgment was released.  All eyes now turn to the Inland Revenue to find out what its next step will be. 

While we see this decision as moving the capital/revenue boundary in Inland Revenue’s favour, we hope they will continue to respect tax positions taken by taxpayers to date where they have been consistent with Inland Revenue’s guidance.  As the Court has essentially rejected the “commitment test” outlined in that guidance, at an absolute minimum there should be no issue of penalties being applied to any taxpayers who have taken tax positions consistent with that guidance.

Please contact a Deloitte tax advisor if you would like to discuss what this Supreme Court decision means for your business.


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