Deep within the Government's Budget can be found mysterious references to "black hole expenditure" and "thin capitalisation rules".
In moves that will give with one hand and take with the other, the Government has proposed to make more expenses claimable while clamping down on foreign entities who load up their New Zealand subsidiaries with debt to offset their income to reduce their tax liability.
Black hole expenditure is a term is used to describe a business expense for which no tax deduction is available. It has been a sore point for many businesses over time in various situations, Deloitte's chief executive Thomas Pippos said in a budget commentary.
The measures announced in the Budget propose to remove black hole expenditure in certain instances including:
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- Immediate deductibility for capitalised expenditure on legal and administrative fees incurred in applying for a patent or plant variety rights, but where no depreciable asset is recognised for tax purposes
- Making certain fixed-life resource consents granted under the Resource Management Act 1991 depreciable for tax purposes
"The amount at stake is often immaterial in any global sense with the irritant and equity factor far exceeding the dollar amounts involved," Pippos said.
The Budget also contained details on the rules around thin capitalisation.
In 2011 the Government changed the rules so that a foreign-owned entity's debt could only represent a maximum of 60 per cent of total assets in the business - suggesting 40 per cent in equity.
New rules in yesterday's Budget are designed to prevent private equity companies from loading up their acquisitions with debt to minimise their tax liability while at the same time disguising their ownership through the use of different funds.
The Budget confirmed that the Government will extend the thin capitalisation rules to where non-residents are "acting together" and together having a controlling interest in a New Zealand investment. The change is expected to generate $20m over three years from 2014/15.