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DET 05/02 Amortisation rates for landfill cell construction expenditure (Nov 05)

This Determination may be cited as "Determination DET 05/02 Amortisation rates for landfill cell construction expenditure ".

  1. Explanation (which does not form part of the Determination)

    This Determination sets out the amortisation rates for landfill cell construction expenditure as determined by the Commissioner of Inland Revenue.
  2. Reference

    This Determination is made pursuant to section 91AAN of the Tax Administration Act 1994
  3. Scope of Determination

    This Determination applies to taxpayers who meet the criteria under section DB 37 of the Income Tax Act 2004 and have incurred landfill cell construction expenditure in an income year starting on or after 10 June 2005. Its application may be supplemented or amended by supplementary Determinations pursuant to section 91AAN(6) of the Tax Administration Act 1994
  4. Interpretation

    In this Determination, unless the context otherwise requires, expressions used have the same meanings as those in sections CB 6B, DB 37, OB 1, schedules 6B and 11 of the Income Tax Act 2004 and section 91AAN of the Tax Administration Act 1994 in respect of an income year starting on or after 10 June 2005 and subsequent income years.
  5. Determination

    Pursuant to section 91AAN of the Tax Administration 1994, for the purposes of section 91AAN(2), the rate set out in schedule 11 of the Income Tax Act 2004 that is to be used to amortise the types of landfill cell construction expenditure, described in the schedule to this Determination and incurred in an income year starting on or after 10 June 2005, shall be, at the election of the taxpayer, either:
    1. 63.5% (straight-line equivalent), or
    2. 63.5% (diminishing value depreciation rate)

This Determination is made by me, acting under delegated authority from the Commissioner of Inland Revenue under section 7 of the Tax Administration Act 1994.

This Determination is signed on the 15 th day of November 2005.

 

Graham Tubb
National Manager
Technical Standards

 

SCHEDULE TO DETERMINATION DET 05/02

AMORTISATION RATES FOR LANDFILL CELL CONSTRUCTION EXPENDITURE

Types of landfill cell construction expenditure to which this Determination applies

 

Cell construction costs

Excavation means costs relating to:

  • earthworks design
  • preparatory works (such as clearing the cell site)
  • earthworks, including excavation, borrowing and filling
  • erosion control measures and remediation of borrowed areas associated with cell construction
  • contractors overheads related to cell construction
  • cell-specific resource consents other than those which qualify as fixed life intangible property.

Cell lining means costs relating to the design, construction and quality assurance of cell liners (clay, geosynthetic, flexible membrane, concrete or bitumen) and protection and separation layers, including reworking and sub-excavation to support subsequent compaction or to provide slope stability.

Leachate drainage means the provision of drainage material to assist in drainage of leachate from the base and sidewalls of a landfill cell.

This excludes drainage pipes and systems designed for the passage and extraction of leachate from the landfill.

Note: The above landfill cell construction expenditure does not include expenditure that relates to the site development of the landfill and expenditure that is deductible under any legislative provision in the Income Tax Act 2004 other than section DB 37.

 

COMMENTARY ON DETERMINATION DET 05/02

AMORTISATION RATES FOR LANDFILL CELL CONSTRUCTION EXPENDITURE

Introduction

This commentary does not form part of the Determination. It is intended to provide assistance in the understanding and application of the Determination.

This Determination sets out the amortisation rates (depreciation-like deductions) that the Commissioner has determined for each of the types of landfill cell construction expenditure that is listed in the schedule to this Determination (referred to in this commentary as "listed landfill cell construction expenditure").

Taxpayers who meet the criteria under section DB 37 of the Income Tax Act 2004 and have incurred the listed landfill cell construction expenditure in an income year starting on or after 10 June 2005, are required to elect to apply either the amortisation rate of 63.5% (diminishing value depreciation rate) or 63.5% (straight-line equivalent).

This Determination does not apply to types of expenditure that are not listed in the schedule to this Determination.

This Determination and this commentary also appear in Tax Information Bulletin Vol 17, No 10 (December 2005).

Criteria under section DB 37 of the Income Tax Act 2004

A taxpayer meets the criteria under section DB 37 of the Income Tax Act 2004 if:

  • the taxpayer carries on a business in New Zealand ; and
  • the taxpayer incurs, in the business, expenditure:
    • that is of a type listed in schedule 6B of the Income Tax Act 2004, other than expenditure listed in part C of the schedule,
    • that is not incurred in relation to revenue account property (other than land that is subject to section CB 6B of the Income Tax Act 2004), and
    • that is not deductible under any other legislative provision in the Income Tax Act 2004 but for section DB 37.

Estimated useful life

The amortisation rate for listed landfill cell construction expenditure is based on:

  • the average planned filling time for commercial landfill cells in New Zealand, and
  • the average estimated economic life of commercial landfill cells in New Zealand.

Commercial landfill cells refer to landfill cells that are constructed by taxpayers in the waste management industry who meet the above criteria under section DB 37 of the Income Tax Act 2004.

For the listed landfill cell construction expenditure, the estimated useful life begins once construction of the commercial landfill cell to which the expenditure relates has been completed and continues until the relevant landfill cell is filled and capped.

The average planned filling time of commercial landfill cells in New Zealand is approximately one year. However, there are operational factors, such as intermediate filling, which mean a commercial landfill cell can be open for more than one year.

The practice of intermediate filling affects the estimated economic life of commercial landfill cells. Intermediate filling refers to situations where a commercial landfill cell can only be filled to a certain level of the cell's capacity in the first year of operation. Intermediate filling may occur due to the size and/or depth of the landfill cell, topographical or other operational factors. Where intermediate filling is involved, the commercial landfill cell will have an estimated economic life longer than the planned filling time of one year.

Inland Revenue has taken into account the fact that even if intermediate filling is involved, most revenues will be derived from a commercial landfill cell in its first year of operation. Using a weighted-average, Inland Revenue has generally applied more weight to the first year of a commercial landfill cell's operation as opposed to the later year(s) before the cell is fully filled and capped.

During the process of making this Determination, Inland Revenue has also taken into account the following matters, but decided that these matters do not significantly impact on the estimated useful life of a commercial landfill cell in New Zealand:

  • future development in waste management technologies and initiatives
  • landfill gas revenues derived from commercial landfill cells
  • the likelihood of reopening commercial landfill cells after they have been capped
  • non-commercial landfills, and
  • commercial landfills in overseas jurisdictions.

The estimated useful life of commercial landfill cells in this Determination has been established by Inland Revenue following extensive consultation with taxpayers in the waste management industry and industry experts.

Amortisation rates

The process adopted in arriving at the amortisation rates for listed landfill cell construction expenditure began with the establishment of an estimated useful life for the commercial landfill cells. This data was then translated into an established straight-line equivalent rate as set out in column 2 of schedule 11 of the Income Tax Act 2004. The straight-line equivalent rate in column 2 is further translated into an appropriate diminishing value depreciation rate as set out in column 1 of s chedule 11.

Although the estimated useful life of commercial landfill cells may vary in New Zealand, the amortisation rates for the listed landfill cell construction expenditure in this Determination are average rates for the waste management industry.

Application of this Determination to expenditure incurred in an income year starting on or after 10 June 2005

This Determination applies to taxpayers who meet the criteria under section DB 37 of the Income Tax Act 2004 and incur the listed landfill cell construction expenditure in an income year starting on or after 10 June 2005.

For example, taxpayers with the standard balance date of 31 March may apply this Determination from 1 April 2006 onwards. They shall not apply this Determination to their 2005-2006 income year or prior income years.

Where taxpayers have an approved non-standard balance date, the Determination applies to the listed landfill cell construction expenditure incurred in income years beginning on or after 10 June 2005. For example, for a taxpayer with a 30 June balance date, the Determination would apply from 1 July 2005.

Tax deductions for landfill cell construction expenditure incurred in those income returns furnished in respect of income years starting before 10 June 2005 should be based on the previous rules that applied. These previous rules will continue to apply to this expenditure, notwithstanding the issue of this Determination.

Additions of new amortisation rates/amendments to existing amortisation rates

Amendments to this Determination will be made by the Commissioner issuing supplementary Determinations pursuant to subsection 91AAN(6) of the Tax Administration Act 1994.

Amendments may include adding further expenditure to those already listed in column 1 of the schedule to this Determination or adjusting the estimated useful life of commercial landfill cells due to operational changes in the waste management industry in New Zealand. Such amendments will be effective for the current or future income years. They will not apply to previous income years.

Changes may also be made to the Determination from time to time by Inland Revenue on receipt of written applications from taxpayers in the waste management industry.

Applications for changes must include the following information:

  • applicant's details - this includes full name, IRD number (if applicable), address, telephone number, fax number and contact person for enquiries,
  • the nature of the amendment to the Determination being sought, and
  • information to support the change requested.

Applications for changes to the Determination are to be sent to:

The National Manager
Technical Standards
National Office
Inland Revenue
PO Box 2198
WELLINGTON

In considering applications for amendments to this Determination, Inland Revenue will continue to consult with relevant taxpayers in the waste management industry and industry experts.

Inland Revenue will discuss any amendment to this Determination with the applicant before it is finalised.