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Inland Revenue

Tax Policy

Chapter 1 - Introduction

1.1 As a general principle, business expenditure whose economic value is expected to decline in value should either be immediately deductible, or, when it provides an enduring benefit, deductible over time if that benefit declines over time. When the tax system does not provide for that treatment, an economic distortion is created.

1.2 This document discusses and seeks submissions on the Government’s proposals for a new treatment of feasibility expenditure and other expenditure that results in an economic cost to a taxpayer, but for which neither immediate deductions nor depreciation deductions are available (“black hole” expenditure).

1.3 There are two main proposals. In broad terms, the first proposal is that for expenditure that meets a new definition of “feasibility expenditure”, businesses will be able to apply International Financial Reporting Standards (IFRS) to determine whether the expenditure is immediately deductible, or must be capitalised. The objective is to ensure that the tax treatment of “feasibility expenditure” is clearer, and to ensure that no expenditure that meets that definition will receive black hole treatment.

1.4 In addition, the second proposal is to allow taxpayers a deduction for expenditure that would have been deducted over time if the expenditure had been successful, but is denied a deduction because the expenditure did not result in a successful asset. The Government believes this would resolve a lot of black hole tax treatment.


1.5 Expenditure that provides an enduring benefit is not immediately deductible because the capital limitation in the Income Tax Act 2007 denies a deduction. Some expenditure that is not deductible immediately will be deductible over time if it forms part of the cost of depreciable property, or another class of asset whose expenditure can be spread over the asset’s expected life (for example, farm improvements).

1.6 Some expenditure will never be deductible, because it is not expected to result in an economic loss.

1.7 Feasibility expenditure is expenditure that is undertaken to determine the practicability of a new proposal. In some cases, the capital limitation will deny an immediate deduction. Because of the early-stage (and thus uncertain) nature of feasibility expenditure, determining whether the capital limitation applies can be difficult.

1.8 Inland Revenue has provided guidance on how to apply the legal test in its Interpretation statement 17/01.[1] This was issued after the Supreme Court’s decision in Trustpower Limited v Commissioner of Inland Revenue[2] (the Trustpower decision), and replaced an earlier interpretation statement on feasibility expenditure. The earlier interpretation statement allowed a relatively wide variety of costs to be deducted immediately. The implication of the Trustpower decision is that less expenditure is immediately deductible, and it must be capitalised instead.

1.9 Requiring more of this expenditure to be capitalised increases the risk that it will ultimately become black hole expenditure. The Government considers that this economic distortion is damaging to the economy, as it is an impediment to productivity growth.

1.10 Feasibility expenditure will, perhaps more frequently than other classes of expenditure, be expected to occasionally result in black hole expenditure. This is because the expenditure may prove that a project is not viable.

1.11 In some cases where feasibility expenditure results in a project not going ahead, the expenditure does not result in a depreciable asset, whereby the feasibility expenditure is deductible over time through depreciation deductions. Instead, the expenditure in those cases can be said to have fallen into a black hole. The Government has already resolved many types of black hole expenditure under an incremental approach over the last few years (for example, software projects).

1.12 By addressing the complexity of the current state of the law, and by removing the black hole distortion, the proposals in this discussion document aim to improve economic efficiency, minimise distortion, reduce compliance and administration costs, and simplify the law where possible. The proposals are expected to result in a wider range of costs being deductible for tax purposes, to improve productivity and to remove a tax impediment to growth.


1.13 If you would like to make a submission on the proposals in this discussion document, email it to [email protected] or post it to:

Black hole and feasibility expenditure proposals
C/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
PO Box 2198
Wellington 6140

1.14 The closing date for submissions is 6 July 2017.

1.15 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.


1 “Interpretation statement 17/01: Income tax – Deductibility of feasibility expenditure”, Tax Information Bulletin, Vol 29, No 3 (April 2017).

2 SC 74/2015 [2016] NZSC 91.