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27 Jul 2016
Appeal Status
No right of appeal

Capital-revenue expenditure: deductible feasibility expenditure

2016 case note – capital-revenue expenditure - feasibility, commitment, resource consents, deductibility, black hole, sufficient connections.

Trustpower Ltd v Commissioner of Inland Revenue [2016] NZSC 91


The Supreme Court disagreed with the Court of Appeal that the general permission in s DA 1 of the Income Tax Act 2004 was not satisfied in relation to expenditure Trustpower made in obtaining resource consents for possible future generation projects, and held that the expenditure was incurred in the course of carrying on its business as a generator and retailer of electricity for the purpose of deriving assessable income.

The Court determined that any expenditure (feasibility in nature or otherwise) addressed to a capital project will generally be on capital account and non-deductible. The Court did not accept the taxpayer’s argument that all feasibility expenditure incurred prior to commitment to obtain a capital asset or enduring benefit (feasibility expenditure) will be deductible. However, expenditure associated with early stage feasibility assessment, that is a normal incident of business, may be deductible, particularly where it is not directed toward a specific project. The Supreme Court’s approach is different in some important respects to that taken in the Commissioner’s Interpretation Statement Deductibility of Feasibility Expenditure (IS 08/02)

Case impact statement

The Supreme Court approach represents the current legal position, and must be applied by the Commissioner and taxpayers from the date of judgment. Accordingly, the Commissioner will be applying the principles in the Supreme Court’s decision in relation to any binding ruling applications, and in any future challenges, and so tax positions taken after the date of the judgment should take the decision into account. However, the Commissioner will not be actively reviewing previous years where taxpayers have applied the Interpretation Statement approach.

The Commissioner is currently reviewing her Interpretation Statement in light of the judgment, and intends to issue a revised version of the statement for public consultation in due course. The Supreme Court decision should be referred to for guidance until any amended Interpretation Statement is issued.

Income Tax Act 2004, Tax Administration Act 1994