Tax consequences of being “green”
KPMG Media Release
19 April 2007
Tax consequences of being “green”
When a famous frog sang, “it’s not easy being green …” he could have been referring to the consequences of being green for New Zealand businesses. As far as the IRD is concerned, it’s not going to get any easier.
The greening of business has tax implications. Some are helpful while others are risky, say KPMG tax partners, Greg Bishop and Spencer Smith. “The key is to pick the winning strategies and avoid the pitfalls of going green.
“Some green initiatives have highly advantageous tax implications such as Research and Development (R&D) tax credits, while others have some tax risk attached. Unfortunately, the IRD needs to be brought into the 21st century,” say the tax partners. “In some areas it is fixated on processes and outdated procedures, not results, and it pays little attention to sound environmental outcomes.”
Businesses are realising that adaptation to the changing business and regulatory environment (and the expectations of customers and stakeholders) is key to their ability to survive and prosper. Sustainability and green issues have become mainstream, and attention to these issues is no longer just about their feel-good factor.
“With so much emphasis from central Government on environmental responsibility, our tax rules should support any business initiatives to comply and be good corporate citizens. However, our environmental tax rules are far from comprehensive, which is not surprising as the IRD has not undertaken a coherent review of the adequacy of existing tax rules in the modern business environment,” say Greg Bishop and Spencer Smith.
“Do not expect the IRD to show much sympathy for the green cause. Currently there are very few sections in the Income Tax Act that allow specific deductions for ‘green expenditure’.”
“We are aware of an instance where a taxpayer sought a binding ruling from the IRD to clarify whether it could claim GST on its restoration costs. The IRD’s response was that GST could not be claimed. The IRD’s rationale was the definition of “input tax” contemplates current or future supplies, not supplies made in the past. While the IRD acknowledged years ago that the GST law probably should be amended for these situations, it still has not featured anywhere on their list of priorities.
“There is a tax provision for certain types of capital expenditure on pollution control but the provisions are specifically limited to types of expenditure related to contaminants. Furthermore, the timing of the deduction means expenditure may occur after the business has ceased, giving rise to tax losses which cannot be used. The current provisions show a very outdated understanding about environmental responsibility. The existing tax laws, with their focus on controlling and monitoring contaminants, need to be brought into line with 21st century practices where environmental restoration and monitoring programmes are increasingly extensive.
“Businesses also need to beware of “black hole” items that are treated as neither tax deductible nor tax depreciable. In many instances, undertaking a programme to become more sustainable can result in cost savings, which should mean the expenditure is tax deductible under general principles. An example might be a feasibility study into acquiring new assets with energy-saving technology. However, outlays for consultants, building alterations and changes to manufacturing or business processes may be treated as capital expenditure. Black hole expenditure can arise where there is no depreciation available, as the expenditure cannot be attached to a physical asset.
“In today’s business climate there should be no question that business expenditure to reduce carbon emissions or increase energy efficiency should be tax deductible or tax depreciable over time. KPMG considers that as a matter of policy, black hole expenditure should be deductible.
“On the good news front the income tax and GST treatment of carbon emission units was still being considered by Government and Inland Revenue. Draft legislation in relation to the emissions trading scheme was expected to be included in a tax bill to be introduced in June,” said the partners.