Taxation of business environmental expenditure
Sections 14, 54, 55, 56, 57, 163 and 203 of the Income Tax Act 2004
New rules for business environmental expenditure were enacted on 21 June 2005 to ensure that all business operating costs, including those for dealing with environmental concerns, are taken into consideration in calculating taxable income, and that the timing of such deductions is appropriate.
A number of remedial changes have been made to clarify the new business environmental tax rules and ensure that the original legislation has its intended effect.
Treatment of by-products
The definition of "deductible environmental expenditure" allows a tax deduction for dealing with by-products on cessation of business. However, taxpayers may deal with by-products before cessation. The words "incurred in the cessation of a business" have been removed from item 7, Part B of Schedule 6B, to ensure that expenditure incurred before the cessation of business on the treatment of by-products is deductible and that there is no distortion between the treatment of by-products before and after cessation of business.
The business environmental rules contain an Environmental Restoration Account (ERA) mechanism that allows business taxpayers, through making a deposit, to set aside a portion of their tax payments to pay for future site restoration and monitoring expenditure.
To ensure that ERA deposits follow the associated restoration liability, taxpayers are allowed to make transfers from their ERAs in a number of circumstances - for example, on the sale of a site. However, a number of the new ERA provisions were unclear on the treatment of transfers.
Section EK 20, which allows the nominated company for a consolidated group to make ERA payments and applications for refunds on behalf of the consolidated group now also makes specific reference to ERA transfers.
Section EK 6 (interest on payments to ERA) has been amended so that interest is payable on an amount that is treated as a payment under sections EK 15, EK 16 and EK 19. Amendments have also been made to treat an amount as a payment under section EK 16 (transfer on death, bankruptcy or liquidation).
The section EK 16 reference to funds being transferred to the Ministry for the Environment has also been removed as subsequent work indicates that it is now unlikely that a restoration liability would be transferred to the New Zealand government (for example, where there is an orphan site).
It was initially proposed that taxpayers would be able to make only one ERA deposit or refund per year. However, in order to increase flexibility, this was subsequently altered. A change has therefore been made to remove the words "or after earlier payment or request for refund" from section CX 43B as this was a reference to the limitation on multiple payments and refunds.
A change has also been made to clarify that there are two types of refunds permitted under section EK 1 - those requested by the taxpayer and those made by Inland Revenue when a taxpayer's ERA exceeds the maximum balance. In calculating the latter, the amount of the refund will be the difference between the actual and permitted balance. The amendments also remove the reference to any amount of refund requested by the taxpayer in subsection EK 12(8).
Removal of the distinction between industrial and non-industrial waste
The previous environmental tax rules applied solely to dealing with "industrial" waste. There was no definition of this term, resulting in uncertainty about when tax deductions were available for environmental expenditure. The new rules no longer make this distinction and also retrospectively remove the word "industrial" for any income year for which a taxpayer took a position on the definition of industrial waste before the introduction of the new rules. An amendment has been made to section DJ 10 in the Income Tax Act 1994 to allow a taxpayer who initially qualifies to have the word "industrial" removed to apply this same treatment for subsequent income years up until the time that the new environmental tax rules apply.
These amendments apply to expenditure incurred in an income year beginning on or after 10 June 2005. The change to section DJ 10 of the Income Tax Act 1994 applies for income years subsequent to 1994-95 if a taxpayer has taken a tax position on the meaning of "industrial waste" before 16 November 2004.