Accountants attack Cullen's retro move

By BRIAN FALLOW

Tax practitioners are critical of the retrospective character of Government plans to plug a hole in the revenue base over the sale and leaseback of intangible property.

It intends to press ahead with legislation to close the loophole John Fairfax Holdings had intended to use in its purchase of INL's newspapers despite Fairfax dropping that part of the deal.

Finance Minister Michael Cullen said: "The Government intends to ensure that taxpayers entering into financing transactions cannot take deductions for what are in substance repayments of principle."

While the law change would not apply retrospectively to deductions already taken, it would capture existing arrangements because it would apply to any payments made or expenses incurred from the application date specified in the new law, Cullen said.

KPMG in a note on the announcement said taxpayers could rightly feel aggrieved at the decision to pull the rug from under existing arrangements.

"Changing laws in this manner does nothing to promote New Zealand as a destination for foreign investment as taxpayers are unable to rely on the Government not to change the tax law when it changes its mind about something that was inserted by Government a decade ago."

Ernst & Young tax partner Rob McLeod, who chaired the most recent review of the tax system, said retrospective change was regarded as repugnant in tax reform. A reputation for acting retrospectively increased the chances of taxpayers altering behaviour on the strength of ministerial announcements, rather than later in the lawmaking process.

KPMG said that intangible property such as the right to use trademarks and patents had only become available for sale and leaseback arrangements in 1993 when the law was changed to allow depreciation on such assets.

Before that they were unsuitable for sale and leaseback because the buyer of the assets could not claim depreciation and was taxed on the gross income the arrangement generated.

McLeod served on the Valabh tax committee in the 1990s which recommended a depreciation regime be implemented for intangible property with a fixed life.

"There was nothing in principle that justified non-deprecation of assets in that arena compared with any other category of assets.

"The depreciation is linked to the historical purchase price of the asset and it has also got to have a fixed life, so that there is a basis on which the amortisation can be calculated.

"Where the mischief potentially arises is with associated persons or arrangements between arms-length persons creating the property and transacting it to create that historical price."