Feasibility expenditure

Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill

Officials' report to the Finance and Expenditure Committee on submissions received on the Bill

February 2001

Feasibility expenditure

Overview
Application date
- Issue: Proposal should be backdated
- Issue: Timing of deduction
Pre-commencement expenditure
- Issue: Deductibility of pre-commencement feasibility expenditure
- Issue: Support for retaining general permission
Gap between proposal and cost base for depreciation
- Issue: Indirect expenditure
- Issue: Asymmetry between feasibility proposals and depreciation
Clawback
Other scope and technical issues

OVERVIEW

Businesses in New Zealand can generally claim a tax deduction for business expenses. Feasibility expenditure is expenditure that is undertaken to determine the practicability of a new proposal. Not all such expenditure is currently deductible and where a deduction is denied, this can deter a firm from investing in that proposal. The August 2016 Supreme Court ruling in Trustpower v Commissioner of Inland Revenue (Trustpower) limited the deductibility of costs incurred to evaluate the feasibility of a project that is later abandoned.

Following that decision, the Bill proposes greater deductibility of feasibility expenditure to encourage business innovation and investment, specifically where expenditure is incurred in developing assets where that expenditure does not result in a completed asset. The proposed changes in the Bill would enable deductions to be spread over a five-year period, with de minimis amounts of expenditure of less than $10,000 being able to be immediately deducted.

The proposals would come into effect for expenditure incurred in the 2020–21 income year.

There were 10 submissions received on the proposals. There was broad support for the main thrust of the proposals, but there was also significant concern that the proposals did not go far enough.

All legislative references in this report refer to the Income Tax Act 2007, unless otherwise noted.

Glossary

Abandonment costs – in the course of abandoning a project, a business could incur further costs relating to remediation or terminating contracts. For example, the cost of restoring a river where work had commenced to dam it.

Balance date – means the last date of a person’s income year. Many New Zealand-owned companies will have a 31 March balance date, while many foreign-owned companies will have a different balance date that is consistent with the wider international group’s reporting and filing obligations.

General permission – The “general permission” allows a deduction where a sufficient link exists between the expenditure and the taxpayer’s business or income-earning activity. That is, a deduction can be claimed for expenditure or loss incurred in the course of earning assessable income or while carrying on a business in order to earn assessable income.

Income year – means the period for which a person’s income tax liability is calculated. This period is generally for 12 months.

APPLICATION DATE

(Clauses 11 and 16)

Issue: Proposal should be backdated

Submission

(Auckland Airport, Corporate Taxpayers Group, Deloitte, EY, PwC)

The submitters consider that application of the feasibility expenditure proposals should be backdated. Submitters have suggested a range of application dates and a range of reasons for backdating.

The amendments should be backdated to the Trustpower decision given that the Court overruled an established position, creating uncertainty as to the point at which costs must be capitalised. Although there is a need to carefully manage the fiscal impacts of any law change, especially in the current environment, the proposals can effectively achieve that balance. (EY)
The application date should be brought forward to the 2019–20 income year to allow taxpayers to utilise the rules where projects have been abandoned due to COVID-19. (Corporate Taxpayers Group, Deloitte)
Implementing tax policy changes based on an income year will usually provide a fair and consistent outcome. However, projects cancelled or deferred as a result of COVID-19 may produce arbitrary and unfair outcomes based on a taxpayer’s balance date. For example, taxpayers with a 31 March balance date may be able to claim deductions for projects abandoned due to COVID-19 between 1 April 2020 and 30 June 2020, while taxpayers with a 30 June balance date would not be able to claim a deduction under the proposed rules for projects abandoned during the same period. The application date should be brought forward to ensure that it covers all expenditure incurred in relation to qualifying capital projects that are abandoned as a result of the impact of COVID-19, not just expenditure incurred after the date the rules take effect. (Auckland Airport, PwC)
Deductions should be allowed for projects that are abandoned on or after 23 March 2020, being the date of the Prime Minister’s announcement of Alert Level 4. (Auckland Airport, PwC)

Comment

The rules are proposed to apply to expenditure incurred in the 2020–21 or later income years for projects that are abandoned during or after the 2020–21 income year.

Officials do not favour backdating the application of the proposals to the Supreme Court’s decision in Trustpower or by a full year (submission points a) and b) above). Either of these approaches would have a significant fiscal cost, as would allowing a deduction for all past expenditure incurred in relation to capital projects abandoned due to COVID-19. Backdating will also not address any economic distortion created by the current law, as taxpayers have already made the relevant investment decisions.

Officials do not consider that taxpayers with early or standard balance dates (for example, 31 March) and who have abandoned capital projects after the announcement of the Alert Level 4 lockdown will generally be significantly advantaged relative to taxpayers with late balance dates (for example, 30 June) who have also abandoned projects around the same timeframe. To qualify for a deduction, the expenditure must have been incurred by the taxpayer in the 2020–21 income year or a later income year (which is unlikely to be the case for a project abandoned due to COVID-19, even for a taxpayer with an early or standard balance date). On this basis, officials do not recommend any backdating.

However, there could be a significant advantage for early and standard balance date taxpayers compared to late balance date taxpayers if the matter raised below by submitters on widening the scope to include costs in abandoning property is accepted (see Issue: Abandonment costs). This is because costs in abandoning property may be incurred for income tax purposes in the period between the Level 4 lockdown announcement and the beginning of the 2020–21 income year for a late balance date taxpayer. As noted below, officials consider that further work is required to understand the impact of including abandonment costs within the scope of the measures. This work could also take into account the interaction between these costs and backdating the proposals to the Level 4 lockdown announcement. However, any work would require prioritising and resourcing as part of the Government’s tax policy work programme.

Recommendation

That the submission be declined.

Issue: Timing of deduction

Submission

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

The timing of the deduction should be clarified in the legislation to confirm that if the decision to abandon the property is made before the tax return for the previous income year has been filed, the deduction can be taken in that tax return, rather than waiting another year to take the deduction in the return relating to the income year in which the property was abandoned.

Comment

The policy intent is for the first deduction under proposed section DB 66 to be taken in the income year in which the property is abandoned. This outcome should not change simply because an income tax return has not been filed for a previous income year. Officials consider this outcome is clear in the draft legislation and no further changes are required to the legislation.

Recommendation

That the submission be declined.

PRE-COMMENCEMENT EXPENDITURE

(Clause 16)

Issue: Deductibility of pre-commencement feasibility expenditure

Submission

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

The scope of the proposals should be expanded beyond abandoned capital projects to include expenditure incurred to explore the viability of investing in a new business asset, property, opportunity or model. In particular, the proposals should apply to “pre-commencement expenditure” (expenditure incurred prior to the underlying business being carried on and that would be currently denied a deduction because it does not satisfy the general permission for deductibility in section DA 1). The general permission should not apply where expenditure meets the proposed feasibility cost definition. This also applies where businesses are “pivoting” in new directions due to COVID-19. (Deloitte, KPMG)
The feasibility rules should provide support to start-ups in particular. (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group)
As long as a person is in business and earning section CB 1 business income, they should be allowed a deduction for pre-commencement expenditure. The link to earning business income along with the private limitation should prevent deductions from being taken inappropriately (for example by taxpayers claiming they were exploring a business by incurring expenditure of a private nature). If this is considered insufficient, the Australian “non-commercial loss rules” for individuals could be adapted to only allow a deduction where certain objective tests are met. (Corporate Taxpayers Group)
An issue is where there is no depreciable asset, but a change to business processes, and progress in relation to a new business process is abandoned (for example a new process is explored in relation to keeping food warm for delivery). It is unclear whether the scope of the rules is wide enough to cover consideration of new business models/services. (Corporate Taxpayers Group)
The legislation or guidance should confirm whether or not an expense incurred that was non-deductible at that time (because, for example, it did not satisfy the general permission) but is later applied towards completing, creating or acquiring property will be deductible under the feasibility rules. (Chartered Accountants Australia and New Zealand)

Comment

The general permission requires there to be a nexus between the expenditure and the derivation of income, or for the expenditure to have been incurred in the course of the person carrying on a business for the purposes of deriving income. In the case of a start-up activity, the general permission is not satisfied means that any expenditure relating to the activity incurred before an actual business has materialised is not deductible.

For a taxpayer with an existing business who is looking to diversify into new product offerings, it means that the proposed change to the taxpayer’s business model has to be very minor for any expenditure incurred in investigating the feasibility of the proposed change to be deductible.

Officials agree there are good reasons for deductions for pre-commencement feasibility expenditure to generally be available to taxpayers with existing businesses. However, expanding the scope of the feasibility proposals to override the general permission in any circumstance is a significant change involving fiscal and integrity risks. Officials refer to a submission to this effect (see Issue: Support for retaining the general permission). A concern (which is particularly relevant in the case of start-ups but in some cases may also apply to taxpayers with existing businesses) is that some taxpayers may claim deductions for expenditure that is of a private rather than business nature, such as for a hobby.

Officials acknowledge that submitters have suggested a range of measures aimed at minimising this risk, but consider that it would nevertheless be inappropriate to make such a significant change without properly working through the detail and consulting on it. Therefore, officials consider it would be better to introduce a fully worked-through proposal for allowing deductions for pre-commencement expenditure for taxpayers with existing businesses at a later stage, rather than attempt to make such a change now. However, further consideration of this matter would require prioritising and resourcing as part of the Government’s tax policy work programme.

Officials disagree with expanding the scope of the proposal to include new business models or processes. This is because the policy intent of the proposed rules is to allow deductions for expenditure that is related to making progress towards acquiring or creating property that, if acquired or completed, would be taxable on disposal (revenue account property) or that would provide benefits that decline in value over time and for which depreciation or amortisation deductions would be available.

Finally, officials consider that the appropriate time for considering whether the general permission is satisfied is at the time the expenditure is incurred, rather than when the property is abandoned. Officials consider that this position is reflected in the proposed legislation. In agreement with the submission at paragraph e), guidance will be provided in the Tax Information Bulletin on this outcome.

Recommendation

That submission points a), b), c) and d) be declined, but agree with submission e) that guidance will be provided in the Tax Information Bulletin.

Issue: Support for retaining general permission

Submission

(EY)

We strongly support the need to maintain a nexus with an established business or income generating activity, and therefore agree with the proposals in so far as they maintain the need to satisfy the general permission for deductibility. An alternate approach risks the tax system being used to subsidise hobbies and business ventures that are not genuine income-earning activities.

Comment

Officials note the submitter’s support for retaining the requirement that the expenditure satisfy the general permission.

Recommendation

That the submission be noted.

GAP BETWEEN PROPOSAL AND COST BASE FOR DEPRECIATION

(Clause 16)

Issue: Indirect expenditure

Submission

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

The wording of the proposed legislation should be wide enough to include indirect expenditure that may be ancillary to the creation of the property. All costs should be captured within proposed section DB 66 in order to prevent any black hole expenditure, even if it would not be able to be capitalised to the cost of property if completed, created or acquired. It would be useful if the legislation included a specific rule to determine the expenditure, both direct and indirect, that would qualify for the deduction. (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, KPMG)
Alternatively, detailed guidance should be published on the Inland Revenue website and in the Tax Information Bulletin or in an Interpretation Statement. (Chartered Accountants Australia and New Zealand)

Comment

Officials consider that the wording of the proposed provisions is broad and captures expenditure that is incurred in relation to making progress towards creating, completing or acquiring property that would be depreciable property or revenue account property, which would include both direct and indirect costs.
In line with standard procedure, following enactment of the Bill, guidance and examples of the types of expenditure within the scope of the proposal will be provided in the Tax Information Bulletin.

Recommendation

That the submission be declined.
That the submission be accepted, noting that guidance will be provided.

Issue: Asymmetry between feasibility proposals and depreciation

Submission

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

There is a potential difference between the expenditure that can be deducted if a capital project is abandoned compared with the counterfactual scenario where the same project is successful.

The scope of the provision in the Bill is too narrow and does not align with the announcements made by the Ministers of Revenue and Finance, which indicated that a deduction would be allowed for feasibility expenditure regardless of whether the project is abandoned. (Chartered Accountants Australia and New Zealand)

Submitters have made some suggestions to address this asymmetry.

Proposed section DB 66(1) could be amended to read: “This section applies when a person has—(a) incurred expenditure for the income year in relation to materially advancing, or tangibly progressing, a specific capital project or depreciable asset, that if it were to be completed, created, or acquired, the property would be…”. This would ensure there is no distinction between a successful and unsuccessful project. The definition of “cost” for depreciation purposes should be amended so that it includes indirect costs that are not otherwise deductible, and which are incurred in relation to making progress towards completing, creating or acquiring the property. Taking this approach should mean that there is no gap where expenditure becomes non-deductible black hole expenditure. (Corporate Taxpayers Group)
The cost of depreciable and revenue account property should be defined consistently in the proposals to ensure there is no residual “black hole” expenditure if the project is successful because the expenditure cannot be capitalised into the cost base of the property. (KPMG)

Comment

Officials acknowledge the matter raised in submissions but consider that the current drafting is broad and sufficient to ensure a broad range of feasibility expenditure will be deductible. The current proposals provide an appropriate balance between fiscal cost considerations and removing tax barriers for investment caused by the non-deductibility of black hole expenditure. In many cases, where property is completed/created/acquired, expenditure on capital account will be able to be capitalised to the cost of the property and be deductible over time.
Officials also note that changing what is included in the cost of depreciable or revenue account property would be a significant change that ought to be fully consulted on. Further consideration of this matter would require prioritising and resourcing as part of the Government’s tax policy work programme.

Recommendation

That the submission be declined.

CLAWBACK

(Clause 11)

Issue: Scope of clawback provision

Submission

(Matter raised by officials)

There is a potential asymmetry between the expenditure that can be deducted under the proposal for feasibility expenditure if the property is abandoned and the expenditure previously deducted that would be returned as income under the clawback provision if the capital project is reinstated (as the clawback provision requires that the expenditure is “directly for the property”). Officials consider that all expenditure deducted under proposed section DB 66 should be returned as income under the clawback if the project is reinstated or the expenditure is used to create, complete or acquire similar property.

Comment

The clawback is an integrity measure directed at situations where taxpayers may be incentivised to unnecessarily abandon work on property, then subsequently reinstate it in order to obtain greater deductions. In order for the clawback to be effective in ensuring there is no incentive for such behaviour, all of the deductions relating to the abandoned property made under proposed section DB 66 need to be clawed back if the project is reinstated or if the expenditure is used to create, complete or acquire similar property. This would ensure that the taxpayer cannot achieve a more favourable tax outcome by prematurely abandoning and then reinstating the project compared with seeing the project through to completion the first time.

Clawing back all expenditure claimed would not undermine the policy intent of the proposals, which would still result in a wide range of costs being deductible for tax purposes and thereby improve productivity and encourage growth.

Recommendation

That the submission be accepted.

Issue: Clawback of deductions – technical/interpretation issues

Submission

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

Submitters have raised a number of technical and interpretation issues with the clawback provision in proposed section CH 13.

References to “or similar property” in proposed section CH 13 should be deleted as this wording is superfluous, may result in overreach and reduces clarity in how the clawback would apply. (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, KPMG)
While there is a need for this integrity measure, clarity is needed as to what is meant by “similar property” which is acquired later. The legislation should provide clarity and Inland Revenue should issue specific guidance as to what is sufficiently similar for the purposes of proposed section CH 13. (EY)
The types of expenditure incurred that may be “directly for the property” are likely to be uncertain and a source of debate. The meaning of deductions that are “directly for the property” should be clarified in the Bill. Failing this, detailed guidance on the types of expenses that would be considered by Inland Revenue to be “directly for the property” should be published on Inland Revenue’s website and in the Tax Information Bulletin. (Chartered Accountants Australia and New Zealand)
The deductions that are “directly” for the property that are subject to the clawback should be more specific, namely those deductions that on subsequent completion or creation of the property are deductible under the depreciation regime or under section DB 23 (as a cost of revenue account property). (New Zealand Law Society)
Guidance should be provided on what factors will be considered when determining whether a project represents the restart of an earlier abandoned project. (PwC)

Comment

In relation to points a) and b) above, officials acknowledge the points raised by submitters about the need for clarity but consider that the “or similar property” wording in proposed section CH 13 is necessary and should be retained. The clawback is an important integrity measure and it would likely be rare for the property that is eventually created, completed or acquired after reinstating a previously abandoned project to be exactly the same as what the taxpayer originally intended to create, complete or acquire, even though it might be very similar. Guidance on the meaning of “similar property” will be provided in the Tax Information Bulletin.

In the preceding item in this report (see Issue: Scope of clawback provision), officials recommend that the scope of the clawback be widened to ensure that all expenditure previously deducted under proposed section DB 66 related to the property is returned as income under the clawback if the project is reinstated. Officials note that if this recommendation is accepted by the Committee, the “directly for the property” wording in the clawback provision noted by submitters in points c) and d) above would no longer need to be clarified as accepting officials’ recommendation would see this wording removed from the provision. As per officials’ comments under Issue: Scope of clawback provision, we do not consider that the deductions clawed back upon reinstatement of the project should be limited to just those expenditures that would form part of the cost base of depreciable property or revenue account property.

In relation to point e), officials agree that guidance on what factors will be considered when determining whether a project represents the restart of an earlier abandoned project would be useful. This guidance will be provided in the Tax Information Bulletin.

Recommendation

That the submission points a), c) and d) be declined, but points b) and e) be accepted and to note that guidance will be provided on the meaning of “similar property” and on what factors would be considered when determining whether a project represents the restart of an earlier abandoned project.

Issue: Clawback – requirement to return income in period of reinstatement

Submission

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

Deductions should not be required to be returned as income in the period the asset is reinstated. This can result in a high upfront cost which could make restarting a project prohibitively expensive and encourage businesses not to go back to previous projects. A more sensible and compliance cost friendly approach would be for the reinstated asset to simply have a lower cost base for tax depreciation purposes, which ultimately achieves the same outcome and is merely a matter of timing. (Corporate Taxpayers Group, Deloitte, EY)

Alternatively, the income arising under the clawback should be able to be spread over five years at the option of the taxpayer to match the period of deductions. (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group)

Comment

The clawback is an important integrity measure. Without it, taxpayers could potentially accelerate depreciation deductions by prematurely “abandoning” and then reinstating capital projects. Although having a lower cost base for the reinstated property for tax depreciation purposes would ultimately achieve the same outcome in terms of the amount of expenditure deducted, timing is important. To avoid incentivising taxpayers to prematurely abandon and then reinstate projects, the taxpayer’s previous position needs to be reinstated before the property begins to be depreciated.

Although officials note the potential cash flow impact of the clawback, it effectively puts a taxpayer back in the position they would have been had they not abandoned the asset. It is important to recognise that the taxpayer would have received a timing benefit from the expenditure claimed under the proposals.

Officials also note that spreading the clawback income over five years as suggested by submitters would create complexity.

Recommendation

That the submission be declined.

Issue: Lack of time limit for clawback

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte, EY, Powerco, PwC)

Several submitters considered that the clawback should be time limited. A number of different approaches were suggested.

The clawback should only apply where property is subsequently completed, created or acquired within five years after the original project was abandoned. (Chartered Accountants Australia and New Zealand)
The period for which the clawback should apply should be limited to the existing time bar period in section 108 of the Tax Administration Act 1994 (which in practice would be a period of four to five years). (Powerco)
At a maximum, the time limit should be no more than seven years (being the period of time for which taxpayers must retain records under the general record keeping rules) (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte, EY, PwC). This seven-year time period should begin at the end of the income tax year that the first one-fifth deduction relates to. (Corporate Taxpayers Group)
The clawback should apply only when an acquisition/project is subsequently completed within two years of the end of the proposed five-year spreading period or where there is a regular pattern of abandoned acquisitions/projects being reinstated. (KPMG)

Comment

Officials have concerns that it may be possible for expenditure to remain useful and be utilised many years in the future in relation to similar property. However, it is important to balance this against genuine business concerns about the availability of information required to make an adjustment under the clawback.

A reasonable compromise in this instance would be to impose a seven-year time limit on the clawback following the end of the income year in which the final deduction is claimed under the five-year spreading method in proposed section DB 66.

Recommendation

That the submission that the clawback be time limited be accepted subject to officials’ comments.

Issue: Interaction between clawback and deductibility proposals

Submission

(Matter raised by officials)

Officials have identified a risk that expenditure could be spread to periods subsequent to the period in which the feasibility expenditure clawback applies. This could result in the clawback potentially not applying to all expenditure claimed under proposed section DB 66.

For example, work is abandoned in Year 1 on property that would have been depreciable property if completed. The taxpayer is allowed a deduction for relevant expenditure over a five-year period. The taxpayer subsequently reinstates work on the property, which is completed in Year 3. Proposed section CH 13 would apply in Year 3 to clawback income based on the amount of expenditure claimed in Years 1 to 3. However, section DB 66 would continue to spread deductions into Years 4 and 5, with no corresponding clawback in those years or subsequently.

Comment

Once property is reinstated, a taxpayer should be brought back to the position they would be in if they had not abandoned the property. This means that clawback should apply to all prior year deductions under proposed section DB 66 and no further deductions should be available under the proposals.

Any lack of clarity can be addressed by preventing the spreading of expenditure under proposed section DB 66 to any periods in which the underlying property has been completed, created or acquired.

Recommendation

That the submission be accepted.

OTHER SCOPE AND TECHNICAL ISSUES

(Clause 16)

Issue: Abandonment costs

Submission

(Auckland Airport, New Zealand Law Society, Powerco, PwC)

The scope of the proposals should be reviewed to ensure the deductibility of expenditure incurred in the course of abandoning projects, such as termination and remediation costs. While some of the expenditure may be deductible under ordinary principles, material amounts would be treated as non-deductible capital expenditure and this gives rise to the same policy concerns as the current treatment of expenditure on feasibility and abandoned capital projects.

Comment

Officials acknowledge the policy argument for allowing taxpayers to deduct abandonment costs. However, officials note that there would be a potentially significant fiscal cost involved in allowing these expenditures to be deducted.

It is further noted that some abandonment costs (such as termination fees for cancelling contracts) may in some instances be capital in nature and not give rise to taxable income to the supplier. In this situation, allowing the other party to the contract to take a deduction for the expenditure creates a potential asymmetry.

Officials consider that further work is required to understand the impact of including abandonment costs within the scope of the measures. However, any work would require prioritising and resourcing as part of the Government’s tax policy work programme.

Recommendation

That the submission be declined.

Issue: Partial abandonment

Submission

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

Where expenditure incurred relates to a component of an item of depreciable property, and the component itself is abandoned but the item of depreciable property is completed (with an alternative component), it is unclear whether a deduction would be allowed for expenditure relating to the abandoned component under these measures or whether expenditure relating to the abandoned component should be capitalised to the cost of the depreciable property and depreciated. Submitters have requested that a clarification be made to the legislation to address this issue.

Alternatively, this uncertainty in treatment should be addressed by issuing guidance on this matter. (Corporate Taxpayers Group, Deloitte)

As a compliance cost measure where taxpayers have capitalised these costs to the cost of the final depreciable property, they should be allowed to retain this treatment rather than have to separate out the costs and treat them as a separate deduction under proposed section DB 66. A taxpayer election in this respect is consistent with the approach taken for capital contributions where taxpayers can either elect to apply a statutory set spreading period or exclude it from the depreciation base of the asset. (Corporate Taxpayers Group)

Comment

It is possible that exploring the feasibility project may produce a number of distinct items of property that together make a larger item of property (with the larger item of property being the overall objective of the project). An example of this may be an electricity lines network where various options exist for a new transmission line route. In this situation it would not be unusual for a part or parts of property to be abandoned.

Officials consider that if the costs that were incurred in exploring the viability of the abandoned property cannot be capitalised to the cost of the overall project in this situation and are otherwise not deductible, a deduction for the expenditure relating to the abandoned option would be available under the proposals as currently drafted. Guidance clarifying this position will be provided in the Tax Information Bulletin.

Recommendation

That the request for the legislation to be amended be declined, but the point about the need for clarity as to what happens when there is partial abandonment be noted. Guidance will be provided on this issue.

Issue: Improvements to farmland

Submission

(Chartered Accountants Australia and New Zealand)

Deductibility should be extended to expenditure incurred in relation to abandoned improvements to farmland that, if acquired, created or completed, would have been amortisable under section DO 4 of the Income Tax Act 2007.

Comment

The submitter points out that feasibility expenditure is commonly incurred by taxpayers in the agricultural sector. Examples given by the submitter are boring wells, small dams and small-scale irrigation.

The proposed rules provide an opportunity for a wider range of expenditure to be deductible, and it is important that they contain appropriate integrity measures to ensure they do not give rise to unintended outcomes. For example, in the course of a capital project, a person could acquire shares in a business that holds assets (for example, intellectual property) that it needs in order to make progress towards creating an item of depreciable property. It is not intended that expenditure incurred on shares would be deductible under the proposals, but there is a risk that the current drafting would allow such a deduction. This problem could be remedied by including a list of expenditure (for example, on separately identifiable assets acquired in the course of completing/creating/acquiring property that is abandoned) that would not be deductible under the proposals.

Recommendation

That the submission be accepted.