Applications for resource consents, patents and plant variety rights
Clauses 39, 41 and 42
Issue: Support for the proposals
Submissions
(Corporate Taxpayers Group, Ernst & Young, KPMG, New Zealand Institute of Chartered Accountants)
Four submitters expressed their overall support for these amendments, based on the removal of “black hole” expenditure on aborted or unsuccessful resource consent, patent and plant variety rights applications.
One submitter notes that the amendments expand the scope of eligibility for deductible expenditure under sections DB 19 and DB 37 of the Income Tax Act 2007. (Corporate Taxpayers Group)
Another submitter notes the amendments legislatively clarify the deductibility of costs associated with failed and withdrawn patent, plant variety rights and resource consent applications. (KPMG)
Comment
Officials note the general support for the proposed amendments.
Recommendation
That the submissions be noted.
Issue: Expenditure incurred on lapsed resource consents should be deductible
Submission
(Corporate Taxpayers Group, Deloitte)
The proposed amendment to section DB 19 should be extended to allow for situations where resource consents lapse or are surrendered. This may happen because its conditions are not met or the resource consent is not exercised. It is appropriate that this expenditure should be deductible as this situation is economically identical to that when a resource consent is refused, withdrawn or not lodged.
Comment
The proposed amendment removes the requirement for taxpayers to have lodged an application for the grant of a resource consent before capital expenditure incurred on an aborted or unsuccessful resource consent can be deducted. This amendment does not currently cover expenditure on a resource consent that is granted but lapses or is surrendered.
Officials agree with submitters that this situation is similar to those covered by section DB 19 as capital expenditure has been incurred on an unsuccessful resource consent. Allowing a deduction for expenditure incurred on lapsed or surrendered resource consents is consistent with the policy intent of removing “black hole” treatment for expenditure on unsuccessful resource consents.
Recommendation
That the submission be accepted.
Issue: Application date for proposed amendments to sections DB 19 and DB 37
Submission
(Corporate Taxpayers Group, Deloitte)
The proposed amendments to sections DB 19 and DB 37 should be made retrospective to 1 October 2005, which is the date their predecessors (sections DB 13B and DB 28B of the Income Tax Act 2004) were inserted, and effective from. These amendments are remedial in nature and ensure that the law reflects the original policy intent of allowing a deduction for capital expenditure incurred in applying for a resource consent or patent that does not give rise to a depreciable asset.
In the regulatory impact statement accompanying these proposed changes, it noted that officials expected that taxpayers would complete abandoned projects and then withdraw them to obtain a deduction under section DB 19. Taxpayers who considered this approach was inappropriate under either resource consent regulations or tax law and have not taken a deduction for expenditure on failed resource consent applications should be able to take the deduction now; this would necessitate making the proposed amendment retrospective.
Comment
The proposed amendment will reduce compliance costs by removing the requirement for taxpayers to apply for the grant of a resource consent to deduct their expenditure. Officials note that this amendment does not clarify the existing policy setting but changes it. Therefore, making the amendment prospective is the appropriate approach. Fiscal cost estimates have also been prepared on this basis.
Recommendation
That the submission be declined.
Issue: Clarification of deductible patent and resource consent expenditure
Submission
(KPMG)
The proposed amendments to sections DB 19 and DB 37 provide only a small increase in additional deductions. Inland Revenue has a narrow view of what constitutes the cost of a patent or resource consent, which is understood to be only the legal and administration costs of the application, so any additional deductions arising from the proposed amendments are likely to be limited. Officials should provide guidance around what additional expenditure will now become deductible under these changes.
Comment
The intent of these changes is to 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. Currently, a taxpayer must have lodged the application before they can receive a deduction. It is not the intent of the proposed changes to extend the types of expenditure deductible under sections DB 19 and DB 37 beyond those types of expenditure that are currently deductible under these sections.
Recommendation
That the submission be declined.