Income tax deductions for resource consent costs
Inland Revenue has released a draft interpretation statement that discusses the tax treatment applicable to the costs of resource consents.
For income tax purposes, resources consents are considered to be either “environmental consents” or “land consents”, and the tax treatment of each type of resource consent differs.
The draft interpretation statement clarifies that the tax treatment of resource consent costs will be fact specific and depend on the type of consent obtained, the costs incurred, and the duration for which the consent endures. The costs of obtaining land and environmental resource consents may be deductible in many instances, and if those costs are not deductible then they may be able to be depreciated, either because the consent is a depreciable asset in its own right (in the case of environmental consents) or as part of the cost base of another item of depreciable property (subject to exceptions).
Inland Revenue is seeking comments on the draft interpretation statement until 3 August 2018. The statement largely clarifies the existing law, but you might like to consider how and why the interpretation statement affects you and your business and pass your views on to Inland Revenue.
Environmental consents are depreciable but land consents are generally not
Environmental consents are consents that are granted in relation to the use of the coastal marine area, the beds of lakes and rivers, water, and the discharge of contaminants. Environmental consents will generally be granted for a fixed term of 5 to 35 years. For income tax purposes, environmental consents are items of depreciable intangible property (i.e., their cost is not treated as part of the cost of a related asset) that can be depreciated using the straight-line method. This effectively spreads their cost, for tax purposes, over their legal life.
In contrast, land consents are consents granted in relation to the use and/or subdivision of land. Land consents usually endure for an unlimited period and cannot be depreciated over their useful life (although an exception exists for land consents that are a right to use land and the consent has a finite lifespan, see below). Instead, land consents may be deductible, or else be able to be depreciated to the extent that the cost of the consent can be capitalised and added to the cost of an item of depreciable property that resulted from the grant of the consent, provided that that item of depreciable property is not land or a building.
The costs of obtaining resource consents may be tax deductible
The costs of obtaining resource consents may be deductible on the basis that they are:
- part of feasibility expenditure that is deductible in its own right;
- costs incurred on revenue account (for example, costs incurred in relation to a property developer’s land stock);
- otherwise specifically deductible under another rule in the income tax rules (for example, a deduction is generally available for the cost of a resource consent where the application for the consent is refused).
When the cost of obtaining a resource consent is not deductible, it may be able to be depreciated. Expenditure may be able to depreciated if:
- it relates to an environmental consent;
- it relates to a land consent with a finite duration and the relevant consent is considered to be a “right to use land” for the purposes of the income tax rules; or
- it relates to a land consent and the cost is part of the cost of an item of depreciable property that is not land or a building.
The “cost” of a resource consent for depreciation purposes generally includes all costs to acquire the consent
As a first step to applying a particular tax treatment to the cost of a particular depreciable asset, it will first be necessary to determine what exactly the “cost” of that consent is for tax purposes.
The draft interpretation statement outlines that “cost” generally “includes that which must be given to acquire something”, and will include expenses incurred in having an asset installed and made ready to use. “Cost” may also include subsequent expenditure incurred in respect of an item of depreciable property, but only if the income tax rules make specific provision for that subsequent expenditure. Ultimately, Inland Revenue considers that determining “cost” requires looking at the transaction “in its commercial reality”, and that assistance can be derived from common business or accepted accounting practice. An amount will not be a “cost” if that amount is separately deductible under a specific provision in the income tax rules.
Inland Revenue has stated that for environmental consents, expenditure on the application, administrative fees, legal fees, hearing costs, and expenditure relating to preparing and compiling the assessment of environmental effects are likely to be part of the “cost” of the resource consent that is depreciable.
Although the draft interpretation statement provides general guidance on the potential tax treatments that apply to resource consent costs, care should be taken to determine the appropriate tax treatment of the costs on a case-by-case basis.
How we can help
We regularly assist clients with both resource consenting and tax issues. Please contact one of our experts if you would like further information or if we can assist you to provide comments on the draft interpretation statement.
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