28 Jul 2016

Concern tax ruling may hurt development

9:43 am on 28 July 2016

Lawyers and accountants are warning a landmark ruling by the Supreme Court could deter big new business projects across New Zealand from getting started.

The ruling means many of the huge costs in getting resource consent for projects cannot be set off against tax, making them more expensive.

At the heart of the case was New Zealand's fifth biggest electricity company, Trustpower.

It paid $17.7 million to get resource consent for four big electric power schemes, which were mostly never built.

Trustpower wanted to deduct that money from its tax liabilities as a business expense.

But the Inland Revenue Department said that expenditure was capital, not expenses, and so was not deductible.

The department secured its position after a legal battle that went all the way to the Supreme Court, leaving Trustpower with a $10m tax bill, $5m in interest payments and a $6m hole in bottom line accounts.

Trustpower's acting chief financial officer Kevin Palmer said his company was able to cope with this loss, and the real impact could be on other business ventures.

"Say, for example, you are deciding whether to build a new factory or whether to outsource that production and get someone else to build it, all the costs incurred in deciding whether or not to build it will not be tax deductible if you decide not to build the factory," he said.

"For many companies that will mean a significant tax impost."

Trustpower is not alone in lamenting this loss of tax assistance in starting up new ventures.

Bridget McArthur is the chairwoman of the Energy Law Association and said the Supreme Court ruling could inhibit a lot of business enterprise.

She said any sector in which participants had a development pipeline of projects would face a dire situation if they had spent a lot of money assessing feasibility of projects, looking at resource consent or obtaining engineering reports.

Problem for government

Geof Nightingale is a veteran tax expert and said there was a case for making resource consents a capital item: they were sometimes part and parcel of a final capital project.

But he said the issue raised a tax policy that had to be addressed.

"Is that the right answer to put a tax hurdle in front of companies who are investigating expansionary opportunities or opportunities to build new assets," he asked.

And he said it gave the government a big problem.

"It potentially gives the government a tax policy problem," he said.

"In recent years they have been trying to make changes to ensure things like research and development costs are deductible.

"What this decision does is potentially make a lot of costs that we thought were deductible non deductible, and that means the cost of investigating new assets or new businesses becomes more expensive."

Mr Nightingale added some of these assets will have neither tax deductibility, nor depreciation under the new decision: something accountants call a black hole.