VIII. Sundry Costs Of Business Operation

8.194. This section discusses the treatment for taxation purposes of a number of costs in conducting business, all of which involve matters raised in submissions.

Lease Transactions

8.195. Division 4 of Part III of the Act contains special provisions dealing with premiums received in relation to the grant, assignment or surrender of a lease and improvements erected by lessees on leased property. However, the application of these provisions was restricted in 1964 and they are no longer generally available. A number of submissions have sought the reintroduction of provisions similar to Division 4 along lines recommended by the Ligertwood Committee.

8.196. In Section IV the Committee has made recommendations for the allowance of depreciation on buildings, including a tentative proposal in relation to allowances in respect of leasehold improvements carried out at a lessee's expense.

8.197. With the introduction of capital gains tax some changes in the law will be necessary in respect of lease transactions generally. Until such time as the Government's proposals in relation to leases under the capital gains tax legislation are known, it would be inappropriate for this Committee to attempt to make detailed recommendations in this area. Clearly the income tax provisions must be blended with those relating to capital gains tax.

Expenditure on Repairs to Income-producing Property

8.198. Two aspects in relation to repair expenditure have been raised. The first relates to what are generally termed initial repairs, being repairs carried out shortly after the acquisition of property. The second refers to the widely accepted practice by business of treating replacement purchases of plant and small tools, of relatively low value, as repair expenditure rather than as items falling to be dealt with by way of depreciation.

8.199. In the case of repairs carried out shortly after the acquisition of property, usually to buildings and to other structural improvements, the practice has developed, in line with a number of legal decisions, of disallowing a deduction for this expenditure where it is apparent that the repairs were necessary at the time of purchase, the general theory being that this would normally be reflected in the purchase price. This practice has been criticised on the ground that it causes administrative difficulties in the case of minor repairs and some inequity.

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8.200. The Committee believes it would be in the interests of taxpayers and the Revenue if a somewhat more flexible approach could be followed, though it is aware that if its recommendations for building depreciation are adopted, some of the complaints will tend to weaken: at present if an allowance is denied for building repairs no deduction is available. The Committee recommends that deductions be allowed for costs of repairs incurred shortly after acquisition, where the expenditure relates to normal maintenance such as painting and minor building repairs. It agrees that major structural repairs, such as the replacement of roof cladding, carried out in the initial period of ownership should continue to be treated as forming, in effect, part of the cost of the property. This is an area in which the issue of guidelines or public information bulletins would be of assistance to taxpayers and their agents.

8.201. A more flexible approach would also be desirable in relation to purchases of plant and tools of small value. Many large business organisations attempt to lessen clerical costs by writing off, in the year of purchase, minor items of plant and maintenance equipment as it is purchased. It is usual to follow this practice of write-off, subject to a limit of, say, $200 for any one item. By so doing, the need for detailed recording of the asset in depreciation schedules is avoided. The Committee recommends that the Commissioner give favourable consideration to requests of taxpayers to be allowed to deal with minor items of a capital nature in this way, within the statutory authority that it is proposed he be given in paragraph 8.47.

Professional Libraries

8.202. A number of requests have been received, mainly from professional bodies, persons and partnerships, for a more realistic deduction for expenditure incurred in respect of the purchase of textbooks and other publications of a professional nature. While a deduction is normally allowable in respect of a subscription to a journal or to a professional body which sometimes carries with it the right to receive periodical publications, other publications, purchased frequently at considerable cost, are deemed to be assets subject to depreciation at the rate of 5 per cent on a fixed instalment basis or 7½ per cent on the reducing balance method. The submissions on this subject complain that these rates are far too low.

8.203. Textbooks and digests are the necessary ‘tools of trade’ of the professional person. New editions are constantly being published as advances in professional knowledge and methods make existing texts redundant. In the legal profession continual changes in the law brought about by the enactment of statutes and decisions of the Courts have a similar effect. The effective useful life of library texts is therefore limited. In order to cope with these continual changes, modern technical publishing, particularly in the field of law, now often takes the form of loose-leaf services. These are regularly updated by revision sheets which supersede existing parts of the service as they become redundant. The Committee understands that the cost of updating sheets is treated by the Commissioner, in the same way as professional journals, as a revenue expense. This treatment seems reasonable. An ancillary feature of the present provisions for professional library depreciation is the administrative problems of recording depreciation and accounting for disposals and their related balancing adjustments.

8.204. Two methods of simplifying the recoupment of capital expenditure on professional libraries warrant consideration. Texts costing less than, say, $40 could be treated as a revenue expense to be written off in the year of purchase, and the rates of depreciation on other texts might be reviewed in the light of the present limited useful life of publications. Alternatively, the rate of depreciation could be set at a realistic

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level, say 20 per cent per annum, calculated on the reducing balance method for the whole library; additions would be added to the written down value of the library at cost while the sale proceeds, if any, of disposals would be deducted from the written-down balance. Where the sales proceeds in any year exceed the written-down balance plus additions in the year, a balancing charge would need to be made. Otherwise balancing allowances or charges would automatically be added to or deducted from the written-down balance. This effective absorption of balancing adjustments removes the need to maintain continued records of the cost of individual texts. The Committee prefers the second method since it simplifies the clerical task of keeping depreciation records and prevents any abuse of an arbitrary limit for any one text.

Travelling and Entertainment Expenses

8.205. Reference has been made in Chapter 7 to the interpretation given to the general deduction section (section 51) of the Act. It is there recommended that an apportioned amount of an outgoing should be denied deduction where it can be inferred from all the circumstances that the character of the outgoing is in part a payment for a purpose which is not the gaining of income. It is not intended, however, that merely because an outgoing such as travelling and entertainment expenses might be said to be extravagant, some part of it must be denied deduction. The proposition asserted in the authorities that the law does not enable the Commissioner to say how much a taxpayer should spend in the gaining of income will continue to be valid. The Committee would not favour provisions, of the kind included in the Canadian law, which would give the Commissioner power to disallow a deduction if he considers that the expenditure involved is unreasonable.

8.206. It may nonetheless be appropriate for the law to specify particular items of expenditure which are likely to involve substantial elements University private consumption by the proprietors of a business and deny them deduction. Recent amendments to the Act deny, for example, deductions of some expenditure on yachts and expenditure on club subscriptions.

Anti-pollution and Ecological Expenditures

8.207. A number of submissions have been received seeking special deductions in respect of expenditure to reduce pollution and to preserve the ecology. Sometimes the expenditure is incurred to prevent pollution of the atmosphere, on other occasions pollution of the soil, streams and ocean, and in yet others to prevent destruction of the environment by its physical alteration. The expenditure may be incurred to comply with legislation, or solely because of the moral obligation of business to avoid inconvenience to the public. The Committee's attention has been drawn to provisions in the United States which allow expenditure of this type to be recouped over five years, and to a similar allowance available in New Zealand.

8.208. The costs are incurred over the broad spectrum of the manufacturing industry and very often in activities connected with mining and other extractive industries. On occasions the costs by way of special equipment, enlarged chimney stacks and treatment of effluent are substantial. Clearly, expenditure in this area warrants encouragement, and special allowances for costs of this kind might be thought justified. However, as what is sought involves an incentive, the Committee merely draws attention to the fact that a number of submissions have been received seeking concessional treatment in this area.