Welcome relief for taxpayers: the next chapter in the feasibility journey
Tax Alert - July 2020
By Patrick McCalman, Vyshi Hariharan and Mahi Kumar
The Government is moving ahead with welcome reform to the deductibility of feasibility expenditure. On 4 June 2020, the Government introduced the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill (the June Bill). The June Bill introduces measures which allow deductions for certain expenditure related to unsuccessful and abandoned assets or business models, as well as, immediate deductions for certain de minimis expenditure as a compliance cost saving measure.
Discussions regarding deductions for feasibility expenditure have spanned a number of years, with initial consultation beginning in 2004 and the original interpretation statement (IS 08/02) being released in 2008. Since then, following the Trustpower judgments of the courts, Inland Revenue released IS 17/01: Income tax – deductibility of feasibility expenditure in February of 2017 (which replaced IS 08/02).
IS 17/01 provides guidance in relation to feasibility expenditure incurred as an ordinary incident of business and which is recurrent in nature. Broadly, it states that a deduction is allowed for such feasibility expenditure, provided the expenditure was not directed towards a specific capital project and / or was so preliminary as not materially advancing or making tangible progress towards a specific capital project (refer our previous Alert article). The current proposals are intended to sit alongside guidance in this interpretation statement.
Since the Trustpower case and the release of IS 17/01, stakeholders have been seeking a revision of the tax rules. An example of where review has been sought is in relation to expenditure on unsuccessful or abandoned projects or investments, where taxpayers would have received depreciation deductions had the project gone ahead, but simply did not because the project was abandoned before it met the definition of depreciable property. Officials undertook consultation and developed some options for reform, outlined in the discussion document Black hole and feasibility expenditure released in May of 2017.
Key features of the proposed measures
The proposed changes in the June Bill allow taxpayers a deduction for expenditure incurred in the 2020-21 and later income years in completing, creating or acquiring property that would be depreciable property (including depreciable intangible property) or revenue account property either if:
- Progress on the asset is abandoned such that the property is not completed, created, or acquired. In this case, deductions meeting the required conditions will be spread in equal proportions over a five-year period, starting from the income year in which progress on the property is abandoned.
Where abandoned property is later completed, the deductions allowed under (1) above would be ‘clawed back’ by treating the amount previously deducted as income in the year the property is completed, created or acquired.
- The total expenditure is NZD 10,000 or less for the income year. In this case, an immediate deduction is allowed.
While the proposed changes override the capital limitation, taxpayers would still be required to satisfy the general permission and the other general limitations. These measures would not apply where a deduction was allowed for the expenditure under any other provision of the Income Tax Act 2007.
A submission date has not yet been set for the June Bill. However, we expect that submissions would close before Parliament rises for the election in August 2020. It will be interesting to see what changes (if any) are made as a result of submissions. Please contact your usual Deloitte advisor if you have any questions or would like assistance with making a submission.
July 2020 Tax Alert contents
- Welcome relief for taxpayers: the next chapter in the feasibility journey