Tax Policy: What to expect in the twenties
Tax Alert - December 2019
By Robyn Walker and Emma Faulknor
We’re about to wrap up a busy year in tax policy in a much different space to what many would have predicted at the start of the year. While in the first half of the year a lot of resource was invested in the capital gains tax people expected to see adopted as a result of the Tax Working Group process, with that proposal being relegated to the scrap-heap, the second half of the year has seen more ‘behind-the-scenes’ tax policy development. As such, 2020 is likely to be a year of delivery from a tax perspective.
Based on the Tax Policy Work Programme, below are our predictions of some of the hot topics for discussion in 2020.
Feasibility and Black Hole Expenditure
Taxpayers have been waiting a while for the Government to reconsider its position on feasibility and black hole expenditure, after the Trustpower decision and Inland Revenue’s subsequent interpretation statement reduced the threshold at which taxpayers could deduct feasibility expenditure.
The current test under Inland Revenue’s Interpretation Statement, Deductibility of feasibility expenditure, IS 17/01, has two limbs:
1. There must be a sufficient nexus with the taxpayer’s income earning activities; and
2. The expenditure must not be of capital nature.
Feasibility expenditure will generally not be subject to the capital limitation (and will therefore be deductible) where it is not directed towards a specific project or, if a specific project has been identified, the expenditure is “so preliminary as not to be directed towards materially advancing that specific project”.
If expenditure doesn’t meet this test, unless it results in a capital asset that can be depreciated, the expenditure will never be eligible for a deduction even if it would have created a depreciable asset if the project was not abandoned (often referred to as “black hole expenditure”) – this is illustrated by the shaded triangle in the diagram.
The Government acknowledged this issue and in September made an announcement that legislation that addresses this problem “… will be included in a taxation bill to be introduced into Parliament early next year, meaning the change can kick in from the start of the next tax year.”
So what is the proposed solution to the black hole problem? Officials are currently undertaking some limited consultation on the detail of the proposal, however we can advise that the proposals are broadly as follows:
- For businesses undertaking smaller amounts of feasibility expenditure, potentially not as a recurrent part of their business, there will be a $10,000 de minimis rule whereby total annual expenditure under this amount can be deducted. This rule will be similar to the existing rules for deducting legal fees, and will remove some of the compliance costs around navigating the capital / revenue gateway.
- For businesses spending over $10,000 in a given year, to the extent the business has incurred expenditure in considering or developing an intended depreciable asset which is then abandoned, those costs will be able to be deducted over a five year period. This rule is intended to apply to expenditure incurred in the 2020/21 and later income years.
These proposals are really positive for businesses, particularly those that are asset intensive. However, will they be a wholesale solution to the problem of black hole expenditure? No, but they are also not designed to be. These proposals are just intended to fix the specific problem of black hole expenditure for depreciable capital assets.
A range of other categories of black hole expenditure will continue to exist, including all costs attributable to land and buildings, costs associated with purchasing shares, equity raising costs, defence costs in a takeover bid, and costs relating to mergers and acquisitions (successful or unsuccessful).
We expect to see more detail on these proposals around March 2020 when a tax bill will be introduced to Parliament. At this point, all interested parties will have the opportunity to comment on the proposed law change.
Loss continuity rules
In addition to proposals on feasibility, we are expecting to hear more on the loss continuity rules in early 2020.
Currently companies have to maintain 49% shareholder continuity to carry forward losses to future years. This can be a problem for many businesses, most prominently start-up companies where they are most likely to incur losses before bringing on additional sources of capital resulting in a breach of continuity.
One solution may be to replicate the same or similar business test used in Australia or lowing the 49% threshold, although the Government has not yet indicated what specific solutions it will be pursuing. We expect a public consultation document to be released in the first half of 2020.
Purchase price allocation
Purchase price allocations have been a focus area by Inland Revenue investigators over several years as they attempt to ensure the values used by vendors and purchasers reflect market values (we have previously commented on this here). The primary concern is that the tax positions taken by taxpayers’ are resulting in asymmetrical tax outcomes, for example, an amount treated by the purchaser as deductible may be treated as non-assessable by the vendor. This often happens where a purchase price allocation is not specifically set out in the sale and purchase agreement and each party adopts their own position. Obviously the best approach is to agree the price allocation in the agreement for sale and purchase.
The tax policy work programme includes a project on purchase price allocations. We expect the outcome of this will be to have legislative requirements for parties to either agree a purchase price allocation or to provide a basis to ensure both parties use the same values. Early consultation on this project is currently underway and we expect to see a consultation document for the public to comment on in the first half of 2020.
Over the last two months there was consultation on the treatment of habitual buying and selling of land and the treatment of holding costs for privately used land that is taxable on sale. We expect that the feedback received on those proposals will be considered by Officials and the Government and incorporated into the first tax bill in 2020.
The biggest recent change in GST has been the introduction of the new low value goods rules which took effect from 1 December 2019. Moving forward, our expectation is that 2020 will see the release of a discussion document on a range of additional GST policy issues.
The Government’s tax policy work programme states there will be a report to Ministers on charities by the end of 2019 addressing the Tax Working Group’s recommendations. We’d expect this to be followed up with some form of public consultation on the issues of interest to Ministers in 2020.
December 2019 Tax Alert contents
- Inland Revenue: “No place to hide overseas income”
- “You Do The Math” – 10 Simple Ways to Keep Inland Revenue Away
- Corporate Tax Governance – From the Top Down…
- Tax Policy: What to expect in the twenties
- Don’t hold back; investment income reporting is almost
- OECD consults on “GloBE” global minimum corporate tax rate
- Snapshot of Recent Developments