Chapter 1 - Introduction
1.1 Budget 2013 announced proposed changes to six areas of “black hole” business expenditure. The proposals were part of the Government’s focus on providing an environment that supports business. This discussion document continues this focus on supporting business growth and innovation by suggesting changes to deal with the “black hole” tax treatment of some research and development (R&D) expenditure.
1.2 Black hole expenditure is business expenditure that is not immediately deductible for tax purposes and also does not form part of the cost of a depreciable asset for tax purposes, and therefore cannot be deducted over time as depreciation.
1.3 Providing tax deductibility, in appropriate circumstances, for capitalised development expenditure that is currently black hole expenditure has the potential to remove or mitigate economic distortions which may act as a disincentive to businesses undertaking R&D.
1.4 The proposals in this document differ from the black hole expenditure changes announced in Budget 2013. One of those proposals will improve the symmetry between the tax treatment of successful and unsuccessful projects by providing immediate deductibility for capital expenditure incurred for the purpose of applying for the grant of a patent or plant variety rights, when no depreciable asset was ultimately created. However, the scope of that proposed change was limited as the current interpretation of the depreciable costs of these assets (discussed in Chapter 2) meant the deductible expenditure was restricted to the legal and administrative costs of seeking to obtain the applicable intellectual property right.
1.5 The proposals in this document go beyond the Budget 2013 proposal announcement, and aim to address black hole R&D expenditure, when the R&D is successful and unsuccessful. Their impact on removing current disincentives to businesses investing in innovation is potentially much greater.
Proposals to address black hole expenditure on successful R&D
Patents and plant variety rights
1.6 The Government proposes allowing depreciation of capitalised development expenditure that relates to an invention that is the subject of a patent or a patent application, or a plant variety that is the subject of plant variety rights.
1.7 Under the Government’s favoured policy option, capitalised development expenditure (that relates to a patent, patent application or plant variety rights, as the case may be) incurred from the date of the release of this discussion document would be allowed to be depreciated over the legal life of the asset to which it relates.
1.8 The Government proposes that the legislation be amended to clarify that capitalised expenditure incurred by a person in the successful development of software for use in their own business is depreciable. This would clarify the law to be in line with the policy intent and the Government’s understanding of current taxpayer practice. To provide certainty for taxpayers, the Government proposes that this amendment be made retrospective to the statutory time-bar.
Proposal to address black hole expenditure on unsuccessful R&D
1.9 The Government proposes allowing a person an immediate tax deduction for capitalised development expenditure they have incurred from the date of the release of this discussion document if:
(i) the intangible asset to which the expenditure relates has been derecognised under the accounting rules (other than due to its disposal) before it is used or available for use—(a) in deriving income; or(ii) the person intended that the expenditure would lead to an item of “depreciable intangible property” (that is, an asset listed in schedule 14 of the Income Tax Act 2007) of the person; and
(b) in carrying on a business for the purpose of deriving income;
(iii) no deduction has been allowed for the expenditure under any other provision.
How to make a submission
1.10 The Government invites submissions on the proposed reforms and points raised in this discussion document. Submissions should be addressed to:
Black hole R&D expenditure proposals
C/- Deputy Commissioner, Policy and Strategy
Policy and Strategy
Inland Revenue Department
PO Box 2198
Or email [email protected] with “Black hole R&D expenditure proposals” in the subject line. Electronic submissions are encouraged. The closing date for submissions is 17 December 2013.
1.11 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for Inland Revenue and Treasury officials to contact those making the submission to discuss the points raised, if required.
1.12 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions, or parts thereof, on the grounds of privacy, or commercial sensitivity, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider that there is any part of it that should properly be withheld under the Act should clearly indicate this.