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

See all articles by John Prebble QC

John Prebble QC

Victoria University of Wellington - Faculty of Law; Institut für Österreichisches und Internationales Steuerrecht, Wirtschaftsuniversität Wien; University of Notre Dame Australia - School of Law

Hamish McIntosh

Woodward Street Chambers

Date Written: February 29, 2016

Abstract

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

Prebble QC, John and McIntosh, Hamish, Deducting Expenditure to Assess the Feasibility of Constructing Capital Assets: Opinions from Inland Revenue, the High Court, and the Court of Appeal (February 29, 2016). Victoria University of Wellington Legal Research Paper No. 24/2016. Available at SSRN: https://ssrn.com/abstract=2740017

John Prebble QC (Contact Author)

Victoria University of Wellington - Faculty of Law ( email )

PO Box 600
Wellington, 6140
New Zealand
+64 4 463 6311 (Phone)
Papers Indexed at HOME PAGE (Fax)

HOME PAGE: http://www.victoria.ac.nz/law/staff/prebble-scholarly.aspx

Institut für Österreichisches und Internationales Steuerrecht, Wirtschaftsuniversität Wien ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

University of Notre Dame Australia - School of Law

Sydney Campus, New South Wales
Australia

Hamish McIntosh

Woodward Street Chambers ( email )

1 Woodward Street
Level 6, Woodward House
Wellington, 6011
New Zealand
(+64) 04 473 3133 (Phone)
(+64) 0274 936 631 (Fax)

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