The 2017 Budget brings a number of small and positive changes to our tax system. There are two key talking points, both of which will be effective from April 1, 2018.
Firstly, codification of the tax treatment for feasibility expenditure aims to provide clarity and parity to businesses investing in potential new revenue streams.
Secondly, the family income package intends to incentivise hard work, improve incomes for families with young children or high housing costs and simplify the tax system.
Changes to feasibility and black hole expenditure:
Feasibility expenditure covers a broad range of costs that a business may incur to determine the viability of a new proposal.
Traditionally, feasibility costs were immediately deductible for tax purposes up until the point in time that there was a definitive commitment to proceeding with a project; this covered a relatively wide variety of expenses.
Last August, the Supreme Court decision in Trustpower Limited v CIR surprised business and tax professionals alike, by substantially reducing the type of feasibility expenditure that could be immediately deductible, requiring it to be capitalised instead.
The case essentially changed the point in time that feasibility expenditure could be deductible from when a specific project was “committed to”, to when “tangible progress” or “material advancement” had been made on a specific project.
Under the Trustpower treatment, if expenditure is incurred on projects that are ultimately abandoned, there is no final asset to capitalise the feasibility expenses against, hence neither immediate deductions nor depreciation deductions are available. In such cases the expenditure is said to have fallen into a ‘black hole’.
Budget 2017 seeks to address this ‘black hole expenditure’, and includes a Discussion Document proposing to restore the availability of deductions for feasibility expenditure to a level that is potentially even wider than the pre-Trustpower rules.
The proposed rules seek to mitigate the effect of Trustpower by restricting the application of the ruling to the specific facts of the case. It is proposed that full tax deductions will be available for:
“expenditure to determine the practicability of a proposal, prior to the commitment to developing the proposal”
If this definition is met, businesses will then be able to apply normal accounting standards to determine whether expenditure is immediately deductible, or must be capitalised and receive depreciation deductions when an asset is created.
The Discussion Document also proposes to allow an immediate deduction for all capitalised expenditure (not just feasibility expenditure) on assets that fail to be completed, which would have been eligible for depreciation deductions on completion.
The tax treatment of feasibility expenditure has undergone a tumultuous period over the last eight years as the Trustpower case fought multiple legal battles in various courts on its path to the Supreme Court. The Discussion Document describes the current tax treatment as an economic distortion that is an impediment to productivity growth and therefore damaging to the New Zealand economy. The introduction of clear guidelines allowing immediate deductions for feasibility expenditure are therefore welcomed as a sensible and necessary initiative taken by the Government, providing businesses with much needed certainty on the tax treatment of feasibility expenditure.
The Discussion Document does not specify whether any changes would be retrospective and the Government are currently seeking submissions on this point.
Family income package
The Budget proposes tax cuts for individual taxpayers by changes to the income tax thresholds and the Working for Families package. Although the changes are small and broad, they add up to useful tax cuts that will be particularly valued by low income earners. It is also hoped that increased spending capacity will be a welcome boost to the consumer economy.
The income tax threshold changes are summarised in the table below:
In effect the changes reduce the overall amount of tax payable on income earned under $52,000, targeting low-income earners. The tax savings will be $11 a week to anyone earning more than $22,000 a year, increasing to $20 a week for anyone earning more than $52,000 a year. Together with the changes to Working for Families, these will give the typical earning household between $1000 and $2000 more per year in disposable income.
For some taxpayers, a large chunk of the tax reduction could be offset by the abandonment of the Independent Earner Tax Credit (IETC). The IETC was worth up to $540 annually for individuals earning between $24,000 and $44,000. However, many eligible taxpayers never claimed the IECT so many of these earners will finally being seeing the tax savings they deserve.
The changes to Working for Families includes increases to the Family Tax Credits rates. Those with a first child under 16 will see a $9 a week tax saving, and savings of between $18 and $27 a week for each subsequent child under 16. The package will also increase the maximum amounts payable to households under the Accommodation Supplement and the weekly payments for the Accommodation Benefit for eligible Student Allowance recipients.
The cumulative effect of these tax cuts will give families more after-tax income to spend on goods and services. It is hoped that the flow-on of income into consumer spending will strongly support economic growth over the next few years. For businesses wanting to reap the benefits of this year’s budget, the challenge will be considering how to make the most of growing consumer spending.