LAWCOMM | 403 | Tax Law | lecture notes |  The best case scenario for a

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

The best case scenario for a deducons issue is to get a full and immediate deducon for the

expenditure – this means it has to be of a revenue nature



But if it is of a capital nature, the next best case is to get a depreciaon deducon –

this means it has to produce a capital asset that is depreciable



But if there is no capital asset, there is nothing to depreciate – so the expenditure is

not deducble at all



Black hole expenditure is problemac because it incenvizes taxpayers to use expenditure to

produce a dud asset in order to get depreciaon deducons – this isn’t economically eﬃcient



Aﬅer this decision, taxpayers were not happy with the ruling and the Income Tax Act was amended on

30 March 2021 in relaon to feasibility expenditure with secon DB 66

DB 66

Feasibility expenditure: spread deducon

(1)

This secon applies when a person has—

(a)

incurred expenditure for the income year in relaon to making progress towards compleng, creang, or acquiring

property that, if it were to be completed, created, or acquired, the property would be—

(i)

depreciable property for which the depreciaon rate is more than 0%:

(ii)

revenue account property; and

(b)

abandoned further progress in relaon to the property, with the result that it is not completed, created, or

acquired; and

(c)

no deducon in relaon to the property or expenditure under any other provision.

(2)

The person is allowed a deducon for the expenditure described in subsecon (1), in equal proporons over a period of 5

income years starng in the year in which they abandon further progress.

(3)

This secon overrides the capital limitaon. The general permission must sll be sasﬁed and the other general

limitaons sll apply.



This basically allows deducons for expenditure for which you are not entled to an immediate deducon, but also

does not produce a capital asset (as it was abandoned) and thus unavailable for a depreciaon deducon – at the point

in me the project is abandoned, in that income tax year, you are entled to a deducon that can be spread over 5

years

The policy of this is that the economic value of business expenditure that is expected to decline in value should

be either immediately deducble or, when it provides an enduring beneﬁt, deducble over me if that beneﬁt

declines over me

If the tax system does not provide that such treatment, an economic distoron is created

DB 67

Feasibility expenditure: immediate deducon

(1)

This secon applies when a person has—

(a)

incurred expenditure for the income year in relaon to making progress towards compleng, creang, or acquiring

property that, if it were to be completed, created, or acquired, the property would be—

(i)

depreciable property for which the depreciaon rate is more than 0%:

(ii)

revenue account property; and

(b)

no deducon for the property or expenditure under any other provision.

(2)

The person is allowed a deducon for the expenditure described in subsecon (1), if their total expenditure described in

subsecon (1) is $10,000 or less for the income year.

(3)

This secon overrides the capital limitaon. The general permission must sll be sasﬁed and the other general

limitaons sll apply.



If the expenditure is $10,000 or less, the taxpayer is entled to an immediate deducon

The policy of this is that any expenditure less than $10,000 is already being deducted anyway, and it is not

worth the burden of conducng a minute examinaon on small amounts



These provisions apply to expenditure incurred in the 2020–21 and later income years

PRIVATE AND DOMESTIC EXPENDITURE – THE PRIVATE LIMITATION



Expenditure of a private or domesc nature is not deducble

(

secon DA 2(2)

)



Case L11

(1989) 11 NZTC 1,085

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