This week’s High Court judgment in favour of TrustPower against Inland Revenue is directly relevant to any business which spends money on resource consents and may also apply to other costs incurred in investigating the acquisition or development of new assets, especially where an asset eventually is acquired or developed.
The case emphasizes the tax benefit of treating as much as possible of that process as investigation or feasibility. Formal or final commitment should be delayed until the last possible moment, at a point when failure is almost inconceivable.
But any business seeking to rely on this case will need to understand the facts of it, before drawing any conclusions about how it might apply. And Inland Revenue may appeal.
The caseconcerned $17.7 million spent by TrustPower in the 2006-2008 years on applying for and obtaining resource consents to four potential hydro or wind power sites, in relation to which TrustPower owned either none of the site, or only a portion of it.
The judgment states that the company did not claim immediate deductions for expenditure on consents in relation to power generation assets which it already owned (though the expenditure in this case would be depreciable). For her part, the Commissioner accepted that expenditure incurred in relation to the four sites before the company decided to apply for resource consents was deductible, as feasibility expenditure.
As found by Justice Andrews, TrustPower was constantly engaged in evaluating the feasibility of acquiring or developing power generation assets. Its evaluation process involved three steps:
- establishing a kind of in-principle feasibility, the last element of which was applying for resource consents
- more detailed work such as the development of civil engineering and designs, calling for tenders from manufacturers, and analysing economic feasibility more carefully, and finally
- preparation of a business case for consideration by the Board. Only once Board approval was obtained would TrustPower be committed to a project.
Were the resource consents assets in their own right?
The first issue considered by Justice Andrews was whether resource consents could be treated as assets at all for tax purposes. This was seen as important because, if they were not assets themselves, then the expense of obtaining them was simply part of the expense of considering the feasibility of the relevant site and was therefore, the parties agreed, deductible.
Thus framed, the question itself is a useful judicial endorsement of the theory that expenditure incurred by an existing business in investigating the possible acquisition or development of a capital asset is deductible up to and until the decision is made to commit to the asset’s acquisition.
The judge held that resource consents were not capital assets in their own right. In doing so, she dismissed the significance of various rules in the tax legislation which are based on an assumption that they are assets – e.g. the inclusion of fixed life resource consents in the list of items of depreciable intangible property, and the special provision allowing a deduction for costs incurred in seeking a resource consent which is unsuccessful.
The basis for holding that the resource consents were not assets appears to have been that they were of little or at least uncertain value, particularly if regarded separately from the project they related to.
Although the answer to the first question was sufficient to decide the case in favour of the taxpayer, Justice Andrews went on to consider a number of further issues raised in the course of the trial.
If they were assets, were the resource consents capital assets?
The first was whether the resource consents, if assets at all, were revenue or capital assets. In this respect the judge also found for TrustPower on the grounds primarily that the real purpose of incurring the expenditure was to assess the feasibility of the projects, rather than to obtain the consents themselves.
She also found it relevant that the resource consents did not of themselves produce any income for TrustPower. Interestingly, the Judge did not discuss the length of term of the consents in any detail, which is often a factor considered by advisors as being of some relevance in this area.
What was the cost of the resource consents?
An issue which was only relevant if the resource consents were capital assets was determining what expenditure should be treated as their cost. This raised again, on a smaller scale, the issue of commitment.
Even if the resource consents were capital assets, costs which were incurred before TrustPower committed to applying for the resource consents were feasibility expenditure (that is, incurred to determine whether it was feasible to apply for a resource consent), and therefore deductible.
Unsurprisingly, TrustPower argued that it was not committed to applying for a consent until very shortly before it actually lodged its application. Expenditure incurred in obtaining consultants’ reports relating to the applications and undertaking the necessary assessments, was incurred before that point. The fact that the reports and assessments would be pivotal documents in the application, and were prepared on the basis that they would be used to support it, was neither here nor there.
The Commissioner on the other hand argued that TrustPower’s decision to spend significant money in obtaining reports and undertaking assessments demonstrated an intention to lodge an application, which was a sufficient level of commitment to end the feasibility period.
Justice Andrews held for the taxpayer on this point also, holding in effect that “commitment” means real commitment. Although as a business matter TrustPower clearly would not have spent the money except in the hope that it would be used to lodge a consent, that fell short of commitment.
Chapman Tripp comments
The TrustPower case sends a clear signal to businesses seeking to deduct expenditure relating to the acquisition or development of capital assets additional to those they already own.
In Milburn v CIR (2001) 20 NZTC 17,017, resource consent application expenditure was not deductible, primarily because Justice Wild found that the taxpayer had committed itself to the development of the relevant quarries before it applied for the resource consents.
In TrustPower, the parties were agreed that there was no commitment to the generation sites until well after the resource consents were obtained. Since the resource consents were not separate assets, this meant the expenditure was deductible. Even if the consents had been separate assets, by ensuring that the facts did not allow a conclusion to be drawn that it was committed to lodging them until shortly before in fact it did so, TrustPower maximised the expenditure for which it could claim an immediate deduction.