The Supreme Court has ruled on the long running dispute between IRD and Trustpower Ltd on the deductibility of feasibility expenditure it incurred.
To remind you of the facts, Trustpower generated and purchased electricity for sale to its customers. Trustpower routinely looked at new generation projects and incurred costs in investigating these and applying for resource consent. While it was investigating projects no decision had been made on if a particular project would proceed. Trustpower deducted these costs as feasibility costs saying they were an ordinary cost of business and as no decision to proceed had been made they were not capital. IRD took the view that from the decision to apply for resource consent costs were a capital asset and therefore non-deductible.
The High Court agreed with Trustpower while the Court of Appeal agreed with the IRD and so the Supreme Court was asked to decide the matter.
The Supreme Court found in favour of IRD concluding:
1. Obtaining resource consents related to capital projects
2. Early stage feasibility expenditure would be tax deductible.
3. The commitment to projects was not the necessary test.
This decision potentially has major implications with the commonly understood boundary between what is deductible and what is capital having been restated by the Supreme Court. IRD will also need to revisit its Interpretation Statement IS 08/02 which is more closely aligned with the position Trustpower adopted.
Many have also suggested a legislative change is required following the Trustpower decision, so it will be interesting to see how the Government responds.