Tauranga-based power generator and retailer Trustpower has lost a $6.5 million argument with the New Zealand Inland Revenue on an appeal.

The Court of Appeal overturned an earlier decision of the High Court and ordered Trustpower to pay the IRD's costs, in a recently announced decision.

The tax dispute between Trustpower and IRD is resolved after seven years.

The argument is over more than $17 million Trustpower spent on resource consents exploring new generation sites for hydro and wind power generation. Tax deductions Trustpower claimed for 2006, 2007 and 2008 are disallowed.

At stake is $6,565,936 of the disputed expenditure of $17.7 million which the IRD classified as incurred as part of the 'consenting” process rather than as part of the 'feasibility” process.

The issue is whether the about $17.7 million spent on consents by Trustpower Ltd in the 2006, 2007 and 2008 tax years is deductible on revenue account in the year in which it was incurred - as the High Court held, or whether the expenditure should be on capital account and depreciated later over time as the IRD argued.

Trustpower spent the money obtaining various consents for four possible future new generation projects in the South Island: two hydro, Arnold and Wairau, and two wind farms, Kaiwera Downs and Mahinerangi.

They are land use consents, water permits and discharge permits. Apart from some of the land use consents, which were for an unlimited duration, the consents were for fixed periods, commencing from 2008 to 2011 and being generally 10, 15 or 35 years.

The four projects were part of Trustpower's development 'pipeline” which contains approximately 200 projects at any time. The purpose of the pipeline is to provide Trustpower with information about the viability, feasibility and costs of building new generation capacity.

Trustpower submitted and the High Court accepted the expenditure was 'feasibility expenditure” and deductible on revenue account because it was incurred in the course of deriving income from the generation and sale of electricity.

The IRD case which was rejected in the High Court, and upheld on appeal, is that the resource consents are themselves intangible capital assets, so that from the time Trustpower was committed to applying for them the money spent was capital expenditure.

The Court of Appeal ruling is that the disputed expenditure was on the capital account. The fact Trustpower may not have made its build or buy decision to commit to the projects before the expenditure was incurred is irrelevant. It was incurred for the purpose of possible future capital projects.

'In our view the resource consents gave Trustpower valuable rights, which were essential to Trustpower's long term programme of future capital works, and valuable options, which enabled Trustpower to postpone decisions for the terms of the consents until it was in Trustpower's interests to construct new generation plant,” says the decision.

'The view that projects in the development pipeline have value as capital assets is supported by the evidence that an unsolicited offer was made to Trustpower to purchase the Kaiwera Downs site, including the resource consents, technical reports and designs, landowner agreements, and any physical assets related to the project. The fact that the offer included the resource consents as part of the project rather than as stand-alone assets does not detract from the significance of this evidence.”

By obtaining resource consents, Trustpower invested unequivocally in capacity, whether or not it was committed at that time to proceed with the build. The investment was inherently capital in nature. The disputed expenditure was incurred for the purpose of enlarging the business structure and not in the course of the company's business as a generator and retailer of electricity.

The order for costs made against the IRD in the High Court is quashed and the TrustPower is ordered to pay the IRD's High Court costs.