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IRD chalks up another win: Supreme Court rejects Trustpower’s appeal

The deductibility of feasibility expenditure on capital projects got knocked back by the Supreme Court in its decision released today (27/07/16). The court said:

“ On a purist view of the capital/revenue distinction, any expenditure (feasibility in nature or otherwise) addressed to a capital project … is necessarily on capital account. On this approach – which has been espoused by Professor John Prebble QC and Hamish McIntosh – the feasibility expenditure in issue was necessarily not deductible.

The approach which we adopt is broadly similar to that proposed by Professor Prebble and Mr McIntosh but, for reasons which we explain, allows for some flexibility, for instance, in respect of initial stages of feasibility work … [W]e consider that some feasibility expenditure referable to proposed capital projects might sometimes be deducted. We do not, however, see such deductibility as extending to external costs incurred in respects which do, or were intended to, materially advance the capital project in question.”



Trustpower Limited, an electricity retailer and generator, spent over $17 million applying for and obtaining resource consents for four proposed electricity generation projects. The issue was whether the expenditure incurred on resource consents was revenue (ie deductible) or capital (non-deductible).

Thumbs down on “commitment approach”

The Supreme Court rejected Trustpower’s argument for a “commitment approach”. Trustpower maintained that the test for deductibility of feasibility expenditure was whether there was a commitment from the taxpayer to proceed with the project; up until that point – ie of commitment to completion of the capital project – the expenditure should be deductible.

The Supreme Court accepted that commitment was material to the application of s DA 1 (the general permission) in respect of new business activities – but not in considering the capital limitation in s DA 2.

The Court was broadly in with the views of Professor Prebble and Mr McIntosh that everything that relates to a possible capital asset is non-deductible, whether or not a capital asset results. The Court accepted that there might be limited situations in which “a judgment call may have to be made in relation to feasibility assessments which are so preliminary in nature that they cannot sensibly be seen as ‘directed to the acquisition of an asset of an enduring character’ “.

The Court also saw practical problems if the commitment approach was endorsed. A taxpayer would be expected to defer commitment as long as possible to maximise the deduction.

Time to revisit interpretation statement IS 08/02?

Inland Revenue had previously indicated it would continue to apply the position set out in the interpretation statement IS 08/02: “Deductibility of Feasibility Expenditure” (Tax Information Bulletin Vol 20, No. 6 (July 2008) until the Trustpower litigation was finally resolved. It will be interesting to see whether Inland Revenue revisits that interpretation statement in the light of the latest Trustpower decision.


Trustpower Ltd v C of IR (SC 74/2015) [2016] NZSC 91

Deducting Expenditure to Assess the Feasibility of Constructing Capital Assets: Opinions from Inland Revenue, the High Court, and the Court of Appeal, by John Prebble and Hamish McIntosh, VUWLRP 24/2016




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