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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 93
o
Judgment (Court of Appeal)
Looked at the applicable law:
Secons DA 1 (general permission), DA 2 (capital limitaon) and EE 6 (depreciable property)
(depreciaon deducons can sll be available even if full immediate deducons are not
allowed, but only if the expenditure produces a depreciable asset)
BP Australia
,
Sun Newspapers
, and Dixon J’s dicta in
Hallstroms
on the capital/revenue
disncon
Applied the factors in
BP Australia
:
The need or occasion which called for the expenditure (i.e. the purpose of the expenditure):
The fact that the expenditure was for the purpose of invesgang the feasibility of
projects in the pipeline does not mean that it was of the same nature as other
operang costs
Feasibility expenditure relang to possible future capital projects was not incurred
in earning income from Trustpower’s exisng business
(they are saying that there is
no nexus between the expenditure and assessable income, so it does not sasfy the
general permission in secon DA 1, but
this is very wrong
)
– therefore, it could not
be of a revenue nature
Fixed or circulang capital test:
The focus should be on the source of the funds (and not their use), but if the focus
was on the use, they were used for feasibility on potenal capital projects – which
again, is not incurred in earning income in the course of carrying on business
(they
are saying that there is no nexus between the expenditure and the carrying on the
business, but
this is also very wrong
)
Once-and-for-all and enduring benefit tests:
The expenditure was recurrent (as Trustpower would connually need to pay to
invesgate the feasibility of future projects), but created an enduring benefit once
the consents were obtained as they lasted from 10 to 35 years
Accounng treatment:
This factor is not determinave
Whether the payments were expended on the business structure or part of the income
earning process:
Obtaining the consents were a crical part of the development of the four capital
projects
The taxpayers were in the business of generang and selling power – the resource
consents were essenally expenditure in relaon to assets (power plants) which
would be used to generate and sell power
(analogous to ice cream machines being
used to make and sell ice creams)
Therefore, the power plants were part of the business structure
In conclusion, the factors pointed to the expenditure being of a capital nature
o
Judgment
Criqued the Court of Appeal’s statement that the expenditure was not incurred in the course of
carrying on a business or in deriving assessable income
It is possible that expenditure incurred prior to commencing a future business (that you
haven’t carried on before in your life) that you then abandon (i.e. you don’t begin the
business) will lack the nexus to the income earning process or in carrying on a business
– but
this is not the case here
The above principle may be best considered as answering the quesons of whether the
taxpayer has made a firm commitment to go into business or commence an income earning
acvity – but in this case, it was obvious that Trustpower had made such commitment
Therefore, the expenditure was incurred in the course of business or for the purpose of
deriving income – it does meet the general permission
The commitment approach to feasibility expenditure was rejected
The commitment approach is that (1) deducons are available up unl the taxpayer firmly
commits to making the asset; (2) at which point they capitalise on the asset unl it is
available for use; and then (3) the asset depreciates, for which you can get depreciaon
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