Feasibility costs reviewed
BURIED within Budget 2017 was the release of a discussion document proposing to reform the income tax deductibility of feasibility expenditure.
Deloitte Dunedin tax partner Peter Truman said the issue had come to prominence following the Supreme Court decision on Trustpower.
The decision resulted in the feasibility expenditure that qualified to be deductible being severely constrained compared with previous practice.
The discussion document generally proposed the tax treatment should be in line with that for financial reporting, he said.
If the accounting standards recognised no assets arose from the expenditure and they should be written off as an expense, the tax rules should follow that.
Where expenditure did need to be capitalised, Deloitte supported the proposal of the cost being added to the cost of resulting depreciable assets so it was amortised over time, Mr Truman said.
‘‘The proposals will find favour in the commercial world. The current treatment, where certain ‘black hole’ expenditure is never deductible either immediately or over time, produced an absurd and very unfair result.’’
The Government was consulting on the design of the rules, he said.
Revenue Minister Judith Collins said tax consequences should not be an obstacle to businesses innovating and pursuing opportunities for growth.
The discussion document proposed improved tax treatment for feasibility and black hole expenditure.
‘‘Where no asset is created on the balance sheet, feasibility expenditure would be immediately deductible for income tax purposes. Where an asset is created, we’re proposing the feasibility expenditure would be capital expenditure for tax purposes.’’
Also, capitalised feasibility expenditure and other expendi ture on an asset abandoned partway through construction would become immediately deductible if it was also expensed under International Financial Reporting Standards (IFRS), she said.
Rather than the new rules being too prescriptive, which only added to compliance costs, Mr Truman favoured a broad deduction with the Government defining future boundaries on policy grounds.
‘‘Too many boundaries needing to be considered add compliance costs to businesses.’’
Deloitte would also support the adoption of a de minimis (about minimal things) threshold being set whereby feasibility expenditure under a set level was deductible without considering the capital/ revenue boundaries any further.
That occurred now with legal expenses below $10,000 in total per year. The same approach, with a threshold of about $40,000, would assist businesses not currently preparing financial statements using the full IFRS framework.