Trustpower test case on tax deductions for project costs reaches Supreme Court

Tuesday 8th March 2016

Trustpower opened its challenge to a judgment against its claim $for 17.7 million of tax deductions on project costs between 2006 and 2008 in the Supreme Court today, in a case being closely watched by other large-scale infrastructure developers.

The Tauranga-based company is seeking to overturn a Court of Appeal ruling backing Inland Revenue Department's decision to disallow tax deductions on spending for a feasibility study when Trustpower took early steps towards obtaining resource consents over four potential generation projects in the South Island, two wind farms and two hydro schemes. The consents covered land use, water permits and discharge permits, and were for fixed periods. An earlier High Court judgment sided with Trustpower.

Counsel for the electricity retailer-generator, Geoff Harley, told the court a company's spending on the feasibility of new projects didn't become a non-deductible capital cost until the business committed to proceeding with a project.

"Unless expenditure relates to and is separate of an identifiable capital asset, it's not a capital cost," Harley said. "Unless it's possible to characterise those resources consents as separate, identifiable, intangible assets then they can't be subject to capital conditions."

Chief Justice Sian Elias and Justices Terence Arnold, William Young, Susan Glazebrook and Mark O'Regan peppered Harley with questions about how to determine what was capital spending and what triggered the shift from a revenue cost into a capital expense.

Harley told the bench it was often difficult to define the status of intangible assets, particularly permissions or rights.

Justice O'Regan asked whether the commitment test meant an entity could effectively choose its tax treatment, Harley agreed that was the case and "simply reflects how a company carries on its business."

Trustpower previously said its forecast exposure for those years was tax payable of $5.9 million and interest of $2.9 million. Adding in later years takes the exposure to a total of $10.6 million plus $4.3 million in interest. The tax payable would largely be an adjustment on the balance sheet unlikely to exceed $2.5 million for all of the years up to March 2015, while the interest cost would be an income statement expense.

The hearing is set down for three days and is continuing.

BusinessDesk.co.nz

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