2014 amendments relating to 'black hole' business expenditure for which taxpayers were previously not allowed immediate tax deduction or depreciation over time.

Sections CG 7B, DB 19, DB 37, DB 40BA, DB 63 to DB 63C, EE 25, EE 57 and schedule 14 of the Income Tax Act 2007 

Several amendments have been made to the Income Tax Act 2007 relating to business expenditure for which taxpayers were previously allowed neither an immediate tax deduction, nor depreciation over time. Such expenditure is commonly referred to as "black hole" expenditure. The two broad areas of black hole expenditure addressed are: expenditure towards applying for resource consents, patents and plant variety rights, and various company administration costs. The changes were part of changes announced in Budget 2013.

Background

Applications for resource consents, patents and plant variety rights

Sections DB 19 and DB 37 previously required a taxpayer to have lodged an application for the grant of a resource consent or a patent in order to obtain a deduction for capital expenditure that failed to give rise to a depreciable asset. A taxpayer who incurred capital expenditure for the purpose of applying for the grant of a resource consent or a patent but did not lodge the application could not receive a deduction for that expenditure. If expenditure would have been depreciable if the intangible asset had been obtained, making this expenditure deductible when it fails to give rise to a depreciable asset improves the symmetry between the tax treatment of successful and unsuccessful expenditure, and reduces distortions against investment in these assets.

Additionally, a deduction was not allowed for expenditure incurred on an application for a resource consent, if the resource consent was granted but not used before it lapsed or was surrendered. This could happen if its conditions were not met or the resource consent was not exercised. This result was inappropriate, as the situation is economically identical to that when a resource consent is refused, withdrawn or not lodged.

Similarly, a taxpayer who incurred capital expenditure for the purpose of applying for the grant of plant variety rights was unable to deduct that expenditure when the plant variety rights were not granted, as there was no equivalent provision to section DB 19 or DB 37 for plant variety rights. As this expenditure would have been depreciable if the plant variety rights had been obtained, making this expenditure deductible when it fails to give rise to a depreciable asset improves the symmetry between the tax treatment of successful and unsuccessful expenditure.

Claw-back for subsequent applications or disposals

After taking a deduction for expenditure incurred on an aborted or unsuccessful application for the grant of a resource consent, a patent or plant variety rights, a taxpayer may use or sell some or all of that application property at a later date. In the case of selling application property, the taxpayer will have conceptually derived income. A claw-back provision was therefore considered necessary to preserve a neutral tax treatment, otherwise taxpayers could receive a deduction that is larger than the loss they have suffered.

The tax treatment of expenditure on application property from an aborted or unsuccessful application that is later used in a successful application and expenditure on a first-time successful application should be neutral. In other words, expenditure on a depreciable intangible asset should be depreciated over the estimated useful life of the asset; that certain expenditure did not create a depreciable asset in the first instance does not change the fact that the expenditure has ultimately created depreciable intangible property. Continuing to allow an immediate deduction for such expenditure would not be a neutral tax treatment. Including a claw-back provision ensures that taxpayers do not receive a timing advantage from immediately deducting expenditure on initially unsuccessful, but ultimately successful, application property instead of spreading depreciation deductions over its estimated useful life.

Company administration costs

The dividend payment process involves authorising, allocating and paying the dividend, as well as addressing any disputes arising over its allocation. Expenditure incurred during this process is a mixture of capital and revenue. However, requiring taxpayers to separately track or apportion this expenditure into its deductible and non-deductible constituent parts could result in disproportionate compliance costs and uncertainty for taxpayers.

Listed companies incur expenditure on an annual listing fee to maintain registration on a recognised stock exchange. Allowing this expenditure to be deductible recognises that its benefit persists for one year only, and is a necessary expense for a listed company.

Annual general meetings (AGMs) are an annual, recurring cost of doing business as a company, while special shareholder meetings are often held to consider a material change in the business of the company. Allowing a deduction for AGM costs while denying a deduction for special shareholder meeting costs ensures that taxpayers are not subject to disproportionate compliance costs or uncertainty over the tax treatment of shareholder meeting costs, and reflects the capital-revenue principles.

Fixed-life resource consents

Depreciation is appropriate for resource consents if they have a fixed life after which they have no economic value. Resource consents granted under the Resource Management Act 1991 (RMA) to do something that would otherwise contravene section 15A or 15B of the RMA have a fixed life of between five and 35 years. Adding these resource consents to schedule 14, which lists items of depreciable intangible property, brings their tax treatment into line with other fixed-life resource consents.

Key features

  • An amendment to section DB 19 removes the requirement for a taxpayer to have lodged an application for the grant of a resource consent before capital expenditure incurred on an aborted or unsuccessful resource consent application can be deducted. The amendment also extends deductibility to situations where a taxpayer obtains the grant of a resource consent, but does not use the resource consent before it lapses or is surrendered.
  • An amendment to section DB 37 removes the requirement for a taxpayer to have lodged an application for the grant of a patent before capital expenditure incurred on an aborted or unsuccessful patent application can be deducted.
  • New section DB 40BA allows a taxpayer a deduction for capital expenditure they have incurred for the purpose of applying for the grant of plant variety rights, if they do not obtain the plant variety rights because the application is not lodged or is withdrawn, or because the grant is refused.
  • New section CG 7B claws back as income, deductions that have been taken for an aborted or unsuccessful application for the grant of a resource consent, a patent or plant variety rights, if the taxpayer subsequently sells or uses the abandoned application property. In the latter case, amendments to sections EE 25 and EE 57 ensure that these costs are included as part of the cost of the new intangible asset for depreciation purposes.
  • New section DB 63 allows companies a deduction for all direct costs associated with the payment of a dividend. This does not include the amount of the dividend itself.
  • New section DB 63B allows listed companies a deduction for expenditure incurred on an annual listing fee to maintain registration on a recognised stock exchange.
  • New section DB 63C allows companies a deduction for expenditure incurred to hold an annual general meeting (AGM) of the shareholders of the company, but denies a deduction for expenditure incurred to hold a special or extraordinary meeting of the shareholders of the company.
  • An amendment to item 10 in schedule 14 ensures that expenditure incurred on resource consents granted under the Resource Management Act 1991 (RMA) to do something that would otherwise contravene section 15A (Restrictions on dumping and incineration of waste or other matter in coastal marine area) or section 15B (Discharge of harmful substances from ships or offshore installations) of the RMA is able to be depreciated over the life of the resource consent.

Application date

The amendments apply from the beginning of the 2014–15 income year.

Detailed analysis

Applications for resource consents, patents and plant variety rights

An amendment to section DB 19 allows a taxpayer who incurs expenditure for the purpose of applying for the grant of a resource consent, but does not obtain the grant because the application is not lodged, a deduction for the expenditure they incurred in relation to the intended application. The deduction is allocated to the income year in which the taxpayer decides not to lodge the application.

The amendment to section DB 19 also allows a taxpayer who incurs expenditure for the purpose of applying for the grant of a resource consent and who obtains the grant, but does not use the resource consent before it lapses or is surrendered, a deduction for the expenditure they incurred in relation to the application. The deduction is allocated to the income year in which the resource consent lapses or is surrendered.

An amendment to section DB 37 allows a taxpayer who incurs expenditure for the purpose of applying for the grant of a patent, but does not obtain the grant because the application is not lodged, a deduction for the expenditure they incurred in relation to the intended application. The deduction is allocated to the income year in which the taxpayer decides not to lodge the application.

New section DB 40BA allows a taxpayer who incurs expenditure for the purpose of applying for the grant of plant variety rights, but does not obtain the grant because the application is not lodged or is withdrawn, or because the grant is refused, a deduction for the expenditure they incurred in relation to the application or intended application. The deduction is allocated to the income year in which the taxpayer decides not to lodge the application, withdraws the application, or is refused the grant of plant variety rights.

Claw-back for subsequent applications or disposals

New section CG 7B is a claw-back provision which applies when a taxpayer:

  • has taken a deduction under section DB 19 or DB 37 or new section DB 40BA (for expenditure on an aborted or unsuccessful resource consent, patent or plant variety rights application), and subsequently derives consideration for the disposal of property acquired as a result of the expenditure on the intended, withdrawn or unsuccessful application; or
  • has taken a deduction under section DB 19 for expenditure on:
    • an aborted or unsuccessful application for the grant of a resource consent; or
    • a resource consent that is granted but is not used before it lapses or is surrendered,
  • and subsequently uses property acquired as a result of the expenditure in obtaining the grant of a resource consent; or
  • has taken a deduction under section DB 37 for expenditure on an aborted or unsuccessful application for the grant of a patent, and subsequently uses property acquired as a result of the expenditure in the lodging of a patent application with a complete specification; or
  • has taken a deduction under new section DB 40BA for expenditure on an aborted or unsuccessful application for the grant of plant variety rights, and subsequently uses property acquired as a result of the expenditure in obtaining the grant of plant variety rights.

When the taxpayer derives consideration for the disposal, the amount that will be clawed back as income will generally be the lesser of the consideration derived for the disposal and the amount of the deduction that has previously been taken. The exception to this will be when the disposal of the property otherwise gives rise to income under the Income Tax Act 2007, in which case the entire amount of the consideration derived from the disposal will continue to be considered income.

When the taxpayer subsequently uses property in the lodging of a patent application with a complete specification or in obtaining the grant of a resource consent or plant variety rights, the amount that will be clawed back as income will be the total amount of deductions taken for expenditure under section DB 19 or DB 37 or new section DB 40BA (whichever applies) to the extent that the property acquired as a result of the expenditure was subsequently used in the lodging of a patent application or in obtaining the grant of a resource consent or plant variety rights.

An amount clawed back under new section CG 7B is income of the taxpayer in the income year of the disposal (in the case of a disposal for consideration), or in the income year of the lodgement or grant (in the case of subsequent applications).

In the case of subsequent applications, an amount clawed back under new section CG 7B can then be included in the cost base of the resource consent, the patent application (and subsequently the patent if it is granted) or the plant variety rights, and be depreciated over the legal life of the depreciable asset in the usual way.

An amendment to section EE 25 ensures that any expenditure clawed back as income under new section CG 7B is included in the cost of a subsequent plant variety rights application for the purpose of calculating the pro-rated deduction for the cost of a plant variety rights application that a taxpayer is allowed when they are granted plant variety rights.

An amendment to section EE 57 ensures that the "base value" used for the purpose of calculating a depreciable asset's "adjusted tax value" includes any expenditure clawed back as income under new section CG 7B.

Company administration costs

New section DB 63 allows a company a deduction for expenditure incurred in authorising, allocating, or processing, the payment of a dividend, or resolving a dispute concerning one of these matters. The dividend itself remains non-deductible.

New section DB 63B allows a listed company a deduction for expenditure incurred as periodic fees of a recognised exchange for maintaining the company's registration on the exchange.

New section DB 63C allows a company a deduction for expenditure incurred in holding an annual meeting of the shareholders of the company to consider the affairs of the company, but denies a deduction for expenditure incurred in holding a special or extraordinary meeting of the shareholders of the company.

Fixed-life resource consents

An amendment to item 10 in schedule 14 includes as an item of depreciable intangible property a consent granted under the Resource Management Act 1991 (RMA) to do something that would otherwise contravene section 15A (Restrictions on dumping and incineration of waste or other matter in coastal marine area) or section 15B (Discharge of harmful substances from ships or offshore installations) of the RMA, if the consent is granted in or after the 2014–15 income year.