Cost of obtaining resource consents held to be capital

Case: Commissioner of Inland Revenue v Trustpower Limited (2015)

Facts

Truspower applied and obtained resource consents in respect of four possible future new generation projects in the South Island. They claimed that the expenditures incurred in the process of obtaining the resource consents are tax-deductible for them. However, the Commissioner thinks otherwise, as they argued that the expenditure was of a capital nature and therefore, not deductible.

Commissioner’s argument

The Commissioner claimed that the expenditures incurred to obtain the resource consents were capital in nature, so the capital limitation in section DA2(1) of the ITA applied to disallow a deduction.

They argued that the resource consents fall under the “depreciable intangible property” under section EE. Schedule 14 of the Income Tax Act clearly stated that consents granted under the Resource Management Act 1991 is a “depreciable intangible property”.

Taxpayer’s argument

Trustpower argued that the expenditure was part of its feasibility costs, thus deduction should be allowed.

Court’s decision

The Court agreed with the Commissioner that the resource consent had the “depreciable intangible property” in nature. However, under section EE7(j), if deduction is allowed, then the depreciation regime will not apply. Therefore, the Court needs to decide whether a deduction was allowed under the general permission.

The starting point is to decide whether an item of expenditure was capital or revenue in nature. The Court concluded that this expenditure has a capital nature, based on these arguments:

• The expenditure incurred helped Trustpower to increase its network and expand its electricity generation business.
• The resource consent enabled Trustpower to secure future contracts.
• This expenditure was not incurred to help Trustpower in carrying the business or earning income of existing business, as Trustpower’s main business activity is the generation and retailing of electricity.
• Expenditure incurred in investigating a new source of income was held to be of capital nature.
• Expenditure incurred in obtaining resource consents and permissions was held to be capital.

Trustpower invested heavily in capacity and improved its infrastructure to obtain the consent. Thus, the expenditure was spent to help Trustpower expand and extend its electricity generation business. The court stated that the investment was capital in nature because there was not a sufficient nexus between the expenditure and the deriving of income.

Therefore, Trustpower could only make deduction for depreciable property under section EE.

Point to note

• Expenditure incurred in investigating a new source of income was held to be of capital nature.
• Expenditure incurred in obtaining resource consents and permissions was held to be capital. 

Reference

TIB, Vol 27, No 8 (September 2015)