Deducting Expenditure to Assess the Feasibility of Constructing Capital Assets: Opinions from Inland Revenue, the High Court, and the Court of Appeal
37 Pages Posted: 2 Mar 2016 Last revised: 5 Mar 2016
Date Written: February 29, 2016
The TrustPower cases in the High Court and Court of Appeal addressed a question on the capital/revenue divide: in calculating its income, could the taxpayer deduct expenses incurred on feasibility studies and resource consents for projected electricity-generating dams and wind farms?
Inland Revenue Interpretation Statement IS 08/02, Deductibility of Feasibility Expenditure, influenced, even dictated, the approach of both Commissioner and taxpayer. Nevertheless, the Statement was an elephant in the room, not mentioned in the judgments in either court. In contrast, in granting leave to appeal, the Supreme Court has questioned “the proposition that the Interpretation Statement is correct in treating ‘feasibility expenditure’ as being on revenue account”.
In the High Court, Andrews J introduced several unorthodox ideas and processes of reasoning. They included the propositions (though Andrews J did not use precisely these words): (i) that expenditure on feasibility studies to weigh up whether to acquire a capital asset is deductible as a matter of revenue; and, it seems, (ii) that expenditure on or in connexion with a capital asset is deductible as revenue expenditure if one has not made a commitment to buying or constructing the asset. This article argues that authority does not support those propositions. Indeed, the Court of Appeal reversed a number of Andrews J’s holdings. The Supreme Court hearing starts on March 8, 2016.
Keywords: Income tax, capital, revenue, feasibility studies, resource consents, deductibility
JEL Classification: H20, H26
Suggested Citation: Suggested Citation