Trustpower ruling leaves Kiwi firms in tax limbo

New Zealand businesses have been left in limbo by a Supreme Court decision on tax deductions.

Electricity provider Trustpower has been involved in a longrunning court fight with the Inland Revenue Department.

It spent $17.7 million investigating and applying for resource consents for four possible new hydro and wind plants.

It claimed the spending was a tax-deductible business cost, because it was part of its strategy to create a pipeline of potential generation projects, which were not necessarily going to go ahead.

The developments were not necessarily going to go ahead.

When Inland Revenue challenged that interpretation, the High Court ruled in Trustpower’s favour. But that has since been overturned by the Court of Appeal and now the Supreme Court.

Tax experts say the latest decision has muddied the waters. It has not offered any clear rules on where the line is between taxdeductible spending to determine the feasibility of a project, and nondeductible capital expenditure.

The court ruled that the expenditure by Trustpower was on capital account as it was specifically referable to, and associated with, tangible progress in respect of particular capital projects.

It said resource consents were a significant step on the way to com- pletion of a project.

Therefore the expenditure was not deductible because of the capital limitation, despite Trustpower not being committed to completion of the projects.

Deloitte tax partner Greg Haddon said the decision was a concern for any New Zealand business that had ambitions to grow.

Any costs incurred in going through the options or working out the best path of progress could potentially now be considered nontax deductible, he said.

‘‘They haven’t given any real certainty on where the line is. At one point they even said, ‘We don’t have to decide where the line is because in this case it’s clearly capital expenditure.’ But some costs could still be deductible.’’

But he said those deductible costs could now be assumed to be at a lower level than businesses had previously thought.

Haddon said the Government would need to step in with legislative guidelines to make it clear to businesses what they could and could not claim when they were determining the feasibility of a project. Businesses had been left in limbo, he said.