KEY POINTS:
Grey areas in taxation rules applying to the increased greening of New Zealand businesses need to be clarified, says a tax expert.
KPMG tax partner Spencer Smith said Inland Revenue needed to move with the times, because of the strong focus in the past few years on sustainable business practices.
Mr Smith said that the tax department now had a specific tax deduction provision only to deal with clean-ups of contaminants.
"It needs to think more broadly about how businesses are dealing with environmental expenditure."
Mr Smith said regulators had to consider the tax consequences of, for instance, local authorities raising the bar for businesses to operate in environmentally acceptable ways.
He said there was increasing pressure to make businesses more energy efficient, including from consumers, shareholders and even employees who did not want to work for a company that had a poor environmental image.
Businesses were realising that adapting to the changing business and regulatory environment was the 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."
But it was not always clear whether steps taken to meet expectations were tax deductible.
"For some types of environmental expenditure, there can be uncertainty around what is an immediately deductible expense and what is capital expenditure [not tax deductible].
"Under a worst case scenario, there may be no tax deduction or depreciation deduction available at all. Businesses do not like that and it discourages them from making this kind of expenditure."
Mr Smith said some tax implications of going green were helpful while others were risky.
New Zealand's tax rules should support 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."
In some areas the department was fixated on processes and outdated procedures, not results, and paid little attention to sound environmental outcomes.
Existing tax laws, with their focus on controlling and monitoring contaminants, needed to be brought into line with 21st century practices, in which environmental restoration and monitoring programmes were 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 could result in cost savings, which should mean the expenditure was 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 might 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."
Mr Smith said that in today's business climate, there should be no question that business expenditure to cut carbon emissions or increase energy efficiency should be tax deductibleor tax depreciable over time.
"KPMG considers that as a matter of policy, black hole expenditure should be deductible."
Revenue Minister Peter Dunne told the Herald he was happy to listen to any proposals from KPMG.
An Inland Revenue spokeswoman said businesses could make deductions for expenses they incurred, in line with the normal business taxation rules.
