Black hole expenditure
Overview
This group of amendments deals with the tax treatment of certain items of “black hole” expenditure that were announced as part of the Budget 2013 revenue package. Black hole expenditure is business expenditure of a capital nature that is not immediately deductible for tax purposes and does not give rise to a depreciable asset, so cannot be deducted as tax depreciation over time. These amendments will remove certain distortions against investment arising from current tax settings, while reducing compliance costs and providing greater certainty for taxpayers.
APPLICATIONS FOR RESOURCE CONSENTS, PATENTS AND PLANT VARIETY RIGHTS
(Clauses 39, 41 and 42)
Summary of proposed amendments
Proposed amendments to sections DB 19 and DB 37 and proposed new section DB 40BA of the Income Tax Act 2007 will allow taxpayers an immediate tax deduction for capital expenditure incurred for the purpose of applying for the grant of a resource consent, patent or plant variety rights, when the application is not lodged or is withdrawn, or the grant is refused.
Application date
The amendments will apply from the beginning of the 2014–15 income year.
Key features
The proposed 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 proposed 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.
Proposed 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of plant variety rights, but they do not obtain the plant variety rights because the application is not lodged or is withdrawn, or because the grant is refused. A deduction under the proposed new section will be 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.
Background
Sections DB 19 and DB 37 currently require 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 has failed to give rise to a depreciable asset. A taxpayer who has incurred capital expenditure for the purpose of applying for the grant of a resource consent or a patent but does not lodge the application is currently unable to receive a deduction for that expenditure.
The proposed amendments to sections DB 19 and DB 37 expand the scope of eligibility for a deduction under these sections to instances when expenditure has been incurred by a taxpayer on an intended application which they decide not to lodge. This removes the need for taxpayers to incur further expenditure in making an application for a grant that is no longer sought in order to access a deduction.
Currently, a taxpayer who incurs capital expenditure for the purpose of applying for the grant of plant variety rights is unable to deduct that expenditure when the plant variety rights are not granted, as there is no equivalent provision to sections 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 will improve the symmetry between the tax treatment of successful and unsuccessful expenditure.
CLAW-BACK FOR SUBSEQUENT APPLICATIONS OR DISPOSALS
(Clauses 16, 54 and 55)
Summary of proposed amendments
Under the proposed new rules, deductions that have been taken for an aborted or unsuccessful application for the grant of a resource consent, a patent or plant variety rights, will be clawed back as income if the taxpayer subsequently sells or uses the abandoned application property. In the latter case, the clawed back amount will be included in the cost of the intangible property to be depreciated over the life of the depreciable asset.
Application date
The amendments will apply from the beginning of the 2014–15 income year.
Key features
Proposed new section CG 7B of the Income Tax Act 2007 is a claw-back provision which will apply when a taxpayer:
- has taken a deduction under section DB 19 or DB 37 or proposed new section DB 40BA (for an aborted or unsuccessful resource consent, patent or plant variety rights application), and subsequently derives consideration for the disposal of application property acquired as a result of expenditure on the intended, withdrawn or unsuccessful application; or
- lodges a patent application after having previously taken a deduction under section DB 37 for expenditure on an aborted or unsuccessful application for the grant of a patent, to the extent that this expenditure also relates to the patent application lodged; or
- is granted a resource consent after having previously taken a deduction under section DB 19 for expenditure on an aborted or unsuccessful application, to the extent that this expenditure also relates to the resource consent granted; or
- is granted plant variety rights after having previously taken a deduction under proposed new section DB 40BA for expenditure on an aborted or unsuccessful application for the grant of plant variety rights, to the extent that this expenditure also relates to the plant variety rights granted.
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 income.
When the taxpayer subsequently lodges a patent application or is subsequently granted 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 the expenditure under sections DB 19 or DB 37, or proposed new section DB 40BA (whichever applies). The clawed-back amount will 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 can be depreciated over the legal life of the depreciable asset in the usual way.
Proposed amendment to section EE 25 will ensure that any expenditure clawed back as income under proposed 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.
The proposed amendment to section EE 57 will ensure 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 proposed new section CG 7B.
Background
It is possible that 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, that a taxpayer may use or sell that application property at a later date. In the case of selling application property, the taxpayer has conceptually derived income. A claw-back provision is necessary to preserve a neutral tax treatment because 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 is not a neutral tax treatment. A claw-back provision will ensure that taxpayers do not receive a timing advantage from immediately deducting expenditure on the initially unsuccessful, but ultimately successful, application property instead of spreading depreciation deductions over the estimated useful life of the depreciable asset created.
COMPANY ADMINISTRATION COSTS
(Clause 44)
Summary of proposed amendments
Proposed new section DB 63 of the Income Tax Act 2007 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.
Proposed 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.
Proposed 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.
Application date
The amendments will apply from the beginning of the 2014–15 income year.
Background
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.
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 approximates the capital-revenue criteria.
FIXED-LIFE RESOURCE CONSENTS
(Clause 124)
Summary of proposed amendment
This proposed amendment to item 10 in schedule 14 of the Income Tax Act 2007 will ensure that expenditure incurred on resource consents granted under the Resource Management Act 1991 (RMA) to do something that would otherwise contravene sections 15A (Restrictions on dumping and incineration of waste or other matter in coastal marine area) or 15B (Discharge of harmful substances from ships or offshore installations) of the RMA can be depreciated over the life of the resource consent.
Application date
The amendment will apply from the beginning of the 2014–15 income year.
Background
Depreciation is appropriate for resource consents if they have a fixed life after which they have no economic value. Resource consents granted under the RMA to do something that would otherwise contravene sections 15A or 15B of that Act 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.