Tax department wins appeal over Trustpower deductions on feasibility costs

Friday 19th June 2015

The Inland Revenue Department has won an appeal against a 2013 High Court ruling over deductions claimed by electricity generator and retailer Trustpower on costs it incurred when investigating the feasibility of renewable energy projects.

In the Court of Appeal today, Justices Ellen France, Douglas White and Forrest Miller ruled in the tax department's favour, quashing the High Court decision siding with the power company, and confirming IRD's disallowing of deductions on $17.7 million of feasibility expenditure claimed in the 2006, 2007 and 2008 financial years. The bench remitted back to the High Court the allocation of some spending as capital rather than revenue in relation to the application of four resource consents.

"Determined objectively, there was a sufficient connection between the expenditure and capital," Justice White said in delivering the judgment. "The object of the expenditure was capital even if, as a matter of Trustpower's corporate governance, the financial decision to apply for the resource consents had not been made and that decision was contingent on what the preliminary work might show."

The disputed expenditure arose from Trustpower taking preliminary steps then applying for and obtaining resource management consents over four potential generation projects in the South Island, being two wind farms and two hydro. The consents covered land use, water permits and discharge permits, and were for fixed periods.

The IRD contended the consents were intangible capital assets, so the spending was capital expenditure and not tax deductible.

"We do not accept Trustpower's submission that the build or buy decision was so intimately connected with the revenue side of the business that the disputed expenditure was on revenue account," the judgment said. "By obtaining resource consents, Trustpower invested unequivocally in capacity, whether or not it was committed at that time to proceed with the build. The investment was inherently capital in nature."

The judges awarded costs on a band B basis to the IRD and quashed the costs order in the High Court.

Infratil, the majority owner of Trustpower, recognised the IRD's appeal as a contingent liability in its annual report, published today. It estimates the cost of tax plus penalties for the 2006 through 2008 tax years to be $8.9 million.

Trustpower shares were unchanged at $7.70, and have slipped 2.5 percent this year.

BusinessDesk.co.nz

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