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Other submissions

Issue:   Further “black hole” expenditure issues


(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, KPMG)

While welcoming of the proposals in the bill to address certain types of black hole expenditure, there are still other areas of black hole expenditure that need to be addressed.

Consideration should be given to the development of a comprehensive solution to address black hole expenditure, such as a “catch-all” provision that provides tax deductibility for expenditure that is not otherwise deductible.  (Corporate Taxpayers Group, KPMG)

There should be a broader review looking at all areas of black hole expenditure. (Chartered Accountants Australia and New Zealand)


Officials’ approach is to consider black hole expenditure issues on a case-by-case basis.  A comprehensive solution to black hole expenditure, such as a catch-all provision, is not currently under consideration.  Different black hole expenditure issues will require individual policy solutions to ensure that their tax treatment remains neutral, consistent and fair.  Given policy resource and fiscal constraints, policy consideration of further areas of black hole expenditure must be weighed against other Government priorities when setting the tax policy work programme.

Officials do not support developing a comprehensive solution to black hole expenditure, such as the Australian approach of allowing all business expenditure that would otherwise be black hole expenditure to be deducted over five years.  Under that approach, deductions would be given for expenditure towards creating assets that would not decline in value over time if they were successful, which would be an inappropriate outcome from an economic perspective.  This would artificially incentivise investment in such assets, which would be inconsistent with the goal of encouraging productivity and growth.  Furthermore, it would be fiscally expensive, and any time period chosen would be arbitrary.  Moreover, Australia has a comprehensive capital gains tax, so providing tax deductibility for capital expenditure leads to fewer fiscal pressures.


That the submissions be declined.

Issue:   Alternative approaches to the current tax depreciation framework should be explored



The proposed allowance of a tax deduction for capitalised development expenditure on a non-depreciable intangible asset when the asset is derecognised allows no deductibility during the life of the asset.  This is a consequence of the framework of New Zealand’s tax depreciation rules, which allow depreciation only when an asset can be demonstrated to have a finite economic (or, in the case of intangibles, legal) life.  Other countries have different approaches, which could be considered.


The policy framework underlying New Zealand’s tax depreciation rules is that tax depreciation should approximate true economic depreciation, so that, as far as possible, tax does not distort investment decisions.  As a general principle, expenditures that result in an asset of enduring value should not be deducted.  The classic example is land.

The tax depreciation rules for intangible assets, however, differ in some notable respects from the rules for tangible assets.

The first is that intangible assets have to be expressly listed in schedule 14 of the Income Tax Act 2007 for them to be depreciable.  This is because the potentially uncertain form, value and useful lives of intangible assets make the risks of allowing tax depreciation deductions much greater than in the case of tangible assets.

Secondly, in the case of intangible assets, the estimated useful life on which depreciation is based is generally the asset’s legal life – for example, 20 years in the case of a patent.  Some might argue that the true economic life of a patent is much shorter than 20 years, so a shorter estimated useful life should be used for tax depreciation purposes.  However, the issue that arises is determining what an appropriate economic life for patents as an asset class is, given that all patents are different.  For example, it may well be that some mechanical patents become obsolete prior to expiry of legal life, while others like pharmaceutical patents may be held for the full legal life.  Different classes of mechanical and pharmaceutical patents may also have varying economic lives.  Also, the costs of holding a patent are unlikely to be significant (just renewal fees) which may mean that taxpayers are more readily able to “carry” patents, even though they are not being used in the income-earning process (for example, as a defensive ploy to prevent a competitor from extracting rents from a patented technology, product or process).

A seven or 10-year economic life, for instance, would therefore be no less arbitrary than the current estimated useful life, which is based on the legal life of a patent.  Officials recognise that the legal life of an intangible asset, such as a patent, is unlikely to be an accurate reflection of true economic life in all instances, but then depreciation is not meant to be a perfect reflection of how assets actually depreciate.  Rather, it is an approximation and, as with any approximation, there will be some assets in the class that depreciate faster and others that depreciate slower than the average.

In the case of an intangible asset, “legal life” is arguably one of the better proxies available as it provides a cap on the life of an asset.  Also, when an event occurs that has the effect that the owner of an intangible asset is no longer able, and will never be able, to exercise the rights that constitute or are part of the asset (for example, where a patent lapses because it is not renewed), the tax rules allow the remaining book value to be written off.  We therefore do not consider that the general approach of depreciating intangible assets over their legal life should be changed.

In the case of intangible assets that have indefinite useful lives because there is no legal limit on their lives, allowing a tax deduction before it is clear that the expenditure is of no on-going value would be inappropriate from an economic perspective as the asset may not actually be declining in value over time.  Even if the asset was declining in value over time, if its useful life is incapable of being estimated with a reasonable degree of certainty, it would not be possible to determine what the economically appropriate life to be used for depreciation purposes should be.

A broad review of New Zealand’s tax depreciation policy settings, involving consideration of approaches in other countries, is not currently under consideration.


That the submission be declined.

Issue:   Unsuccessful software development


(Matter raised by officials)

A remedial amendment should be made to section DB 40B of the Income Tax Act 2007, to ensure that taxpayers can obtain a deduction for expenditure they incur in unsuccessful software development.


The bill contains an amendment in clause 105 that clarifies that capitalised expenditure incurred by a person in the successful development of software for use in their own business is depreciable.

The clause achieves this by inserting new section EE 18B into the Income Tax Act 2007.  This enables the capitalised costs incurred in developing the software to be included in the depreciable cost of “the copyright in software”, which is already listed as an item of “depreciable intangible property” in schedule 14 of the Income Tax Act 2007, rather than making “software” a separate depreciable intangible asset, by adding it to schedule 14.  The primary reason for this drafting approach is that it is preferable to have one general provision that includes expenditure incurred on a non-depreciable intangible asset in the depreciable costs of a related depreciable intangible asset.  Otherwise, separate legislative amendments would be necessary whenever a legislative interpretation is reached about what the depreciable costs of an item of depreciable intangible property are that is inconsistent with the policy intent.

Officials have identified that, as a consequence of this drafting approach, a remedial amendment to the wording of existing section DB 40B of the Income Tax Act 2007, which allows a taxpayer a deduction for expenditure they incurred in the unsuccessful development of software for use in their own business, would be desirable.  To obtain a deduction, section DB 40B(1)(b) requires that “the software would have been depreciable property … if the development had been completed”.

Under the drafting approach adopted in the bill, “software”, in its own right, will still not be depreciable property.  Therefore, on a literal interpretation, a deduction under section DB 40B could never be obtained because the requirement in section DB 40B(1)(b) could never be met.

Therefore, officials recommend that a remedial amendment be made to section DB 40B of the Income Tax Act 2007, to ensure that taxpayers can obtain a deduction for expenditure they incur in unsuccessful software development.


That the submission be accepted.