The Inland Revenue Department released a new draft “Interpretation Statement” (IS) that reflects a revised position concerning the income tax deductibility of a feasibility expenditure. Consultation on the draft IS closes 9 November 2016.
The draft IS reflects the holding of the Supreme Court in Trustpower Ltd v CIR  NZSC 91, and once final, the new IS will update and replace a prior “Interpretation Statement” IS 08/02. The draft IS confirms that the Trustpower decision must be applied by both the Commissioner and taxpayers from the date of the judgment. Therefore, IS 08/02 can no longer be relied upon for tax positions taken from that date.
The draft IS confirms that an expenditure is likely to be deductible if it is part of the ordinary course of the taxpayer’s business, and it does not add to the business structure or contribute to obtaining an enduring benefit. Importantly, it also confirms that whether or not the feasibility expenditure results in a capital asset is irrelevant to determining deductibility. The draft IS sets out a new approach to determining the deductibility of early stage feasibility expenditure. Such expenditure will be deductible in two situations:
This means that early stage feasibility expenditure is divided into expenditure for a specific capital asset or project and that which is not. The “specific expenditure” is in turn divided into preliminary and that which materially advances the project (with the latter being non-deductible). Examples are given in the draft IS to illustrate the new approach.
Read an October 2016 report [PDF 369 KB] prepared by the KPMG member firm in New Zealand
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