Claw-back for subsequent applications or disposals
Clauses 16, 54 and 55
Issue: Support for the proposals
Submission
(New Zealand Institute of Chartered Accountants)
The submitter expressed overall support for these amendments which claw back (or recapture) deductions for failed expenditure on applications for resource consents, patents and plant variety rights as income when abandoned application property is sold or used as part of another intellectual property right.
Comment
Officials note the general support for the proposed claw-back amendments.
Recommendation
That the submission be noted.
Issue: The claw-back provision overreaches
Submission
(Corporate Taxpayers Group, Deloitte, KPMG, New Zealand Institute of Chartered Accountants)
The scope of proposed section CG 7B(4) is currently too wide. In its current form it claws back “the total amount of deductions” that were allowed under sections DB 19, DB 37 or proposed new section DB 40BA. Clawed-back income should only correspond to deductions for expenditure on an aborted or failed application to the extent that property obtained as a result of that expenditure is subsequently used in the lodging of a patent application or in obtaining the grant of a resource consent or plant variety rights.
The proposed claw-back provision does not simply claw back the additional capital costs that the bill proposes to make deductible, but also includes deductions currently (and previously) allowed under sections DB 19 and DB 37. It could also possibly result in the claw back of previously deducted feasibility expenditure. (KPMG)
If this proposal is not changed, the clawed-back income should be limited to the lesser of the value of the failed expenditure previously deducted and the disposal proceeds (or the value of the new intellectual property created). (KPMG)
Comment
Officials agree with the submission that the drafting of the provision should be changed to reflect the intended policy outcome of only clawing back deductions for expenditure on an aborted or failed application to the extent that property obtained as a result of that expenditure is subsequently used in the lodging of a patent application or in obtaining the grant of a resource consent or plant variety rights.
Recommendation
That the submission be accepted.
Issue: When clawed-back income should be returned
Submission
(Corporate Taxpayers Group, Deloitte)
Proposed new section CG 7B does not specify when the clawed-back income should be returned. While this should be straight-forward to determine when the abandoned application property is sold, it will be less straight-forward when the property is used for the purposes of another resource consent application. Clawed-back income should not arise until the resource consent is granted.
Comment
Officials agree with the submission, and wish to draw the submitters’ attention to the wording of proposed section CG 7B(2)(b), which states that a person has income “if the application property is used … in obtaining the grant of a resource consent”.
We agree that a timing-of-income provision should be added to provide clarity about which income year the income is allocated to.
Recommendation
That the submission be accepted.
Issue: Claw-back of deductions for subsequent applications
Submission
(Ernst & Young)
The submitter notes it is reasonable to claw back deductions if the application property, for which a deduction under sections DB 19, DB 37 or proposed new section DB 40BA has been taken, is disposed of for consideration. This is equivalent to depreciation recovery income.
The submitter suggests that it is not appropriate to claw back deductions if abandoned application property is later used in making a patent application or obtaining the grant of a resource consent or plant variety rights. There is likely to be uncertainty around whether expenditure incurred on making an application of the above type, that does not represent expenditure on any underlying invention or plant variety, has given rise to any identifiable property and whether it has then been used in obtaining the grant of a resource consent or plant variety rights or making a patent application.
There is also no precedent for such a claw-back provision for either tangible or intangible depreciable property. For example, this does not apply to deductions allowed for unsuccessful software development. Such a claw-back provision would therefore be inconsistent with existing policy settings.
Comment
Officials note the concerns of the submitter but note this claw-back rule is an important integrity measure. Without a claw-back rule for deductions on expenditure on abandoned application property that is subsequently used in a successful application, taxpayers could obtain a timing advantage on their deductions compared with a taxpayer who makes a first-time successful application, for which the expenditure would be depreciable over the life of the resource consent, patent or plant variety rights.
Recommendation
That the submission be declined.
Issue: Remove unnecessary provisions in proposed new section CG 7B
Submission
(Corporate Taxpayers Group)
Paragraphs (a) and (b) of proposed new section CG 7B(1) are superfluous as they repeat conditions which must have been met to satisfy section CG 7B(1)(c).
Comment
Officials agree with the submission and recommend a change to the drafting of the legislation to remove the unnecessary paragraphs.
Recommendation
That the submission be accepted.
Issue: Relationship between proposed new section CG 7B and sections EE 25 and EE 57
Submission
(New Zealand Institute of Chartered Accountants)
When “application property” is subsequently used in the production of an item of depreciable intellectual property, the drafting of the legislation should match what is proposed in the Commentary on the bill, which is that the clawed-back amount will be depreciated over the life of the new asset.
The Commentary on the bill states that the clawed-back amount will be included in the cost of the intangible property to be depreciated over the life of the new depreciable asset. The method adopted by the legislation would seem to be that proposed new section CG 7B(2)(b) deems the amount to be “income” and that the cost is then included in the proposed modifications to sections EE 25 and EE 57. There would seem to be no obvious linkage between these steps and it would be useful if the linkage between proposed new section CG 7B and the other provisions could be signalled in proposed new section CG 7B.
Comment
The submitter has correctly explained the intended interaction between proposed new section CG 7B and the proposed amendments to sections EE 25 and EE 57.
Officials are happy to provide additional clarity around how proposed new section CG 7B links with sections EE 25 and EE 57, by including a “signpost” within proposed new section CG 7B.
Recommendation
That the submission be accepted.
Issue: Inclusion of “plant variety rights” in section EE 57
Submission
(New Zealand Institute of Chartered Accountants)
Clause 55 should be amended to exclude “plant variety rights” as these are already dealt with under clause 54.
The proposed new section EE 57(3)(cb) will only apply if the “expenditure has given rise under section CG 7B to an amount of income”. Therefore, the expenditure on a failed plant variety rights application is taken into account for depreciation purposes under the proposed amendment to section EE 25(3)(a) and does not need to be duplicated in the proposed new section EE 57(3)(cb). The total deductions in section EE 60 specifically include the amount of a deduction under section EE 25.
Comment
Officials disagree with this interpretation of the relationship between proposed section CG 7B and sections EE 25 and EE 57 under the proposed amendments to them. Section EE 25 allows a pro-rated deduction for the cost of a plant variety rights application when plant variety rights are granted. The proposed amendment to section EE 25(3)(a) ensures that any expenditure clawed back as income under proposed new section CG 7B is included within the cost of a subsequent plant variety rights application for the purposes of this deduction. Without the proposed amendment, the taxpayer would be entitled to a smaller deduction.
Once they are granted, plant variety rights, being an item of fixed-life intangible property, should be depreciated over their legal life. Section EE 57 determines the “base value” (or the cost) of an item for depreciation purposes. “Total deductions” determined in section EE 60, are then subtracted from the base value to determine the “adjusted tax value” of the item which reflects the item’s cost less depreciation deductions claimed in previous years. The item’s adjusted tax value is then used when calculating a year’s depreciation deduction.
If plant variety rights are not included within proposed new section EE 57(3)(cb), the clawed-back amount would not be added to the base value of the asset, and consequently would not be depreciable.
Recommendation
That the submission be declined.