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Business income tax
Te take whiwhinga pakihi
Claiming business expenses: Environmental expenditure

Environmental restoration account scheme

Some business activities cause environmental damage when they discharge a contaminant. The business must later restore this damage. The environmental restoration account (ERA) scheme allows businesses to set money aside to cover their monitoring or restoration costs to do this.


How the scheme works

The business deposits funds into an Environmental Restoration Account (ERA). They get a tax deduction for the deposit so their cash position remains unchanged.

We pay interest on the money while it is held in the scheme and a refund when environmental restoration costs are incurred.

The refund is treated as assessable income but this is matched by the deduction for the environmental restoration costs.

These examples show how the scheme works:

Example 1
2007 A company (that qualifies and has no existing restoration provision in 2005-06) plans to set aside $10,000 in their financial accounts to pay for future environmental restoration.

The company tax rate is 33%, so they deposit 33% of the money set aside in their ERA. That is, they send us a cheque for $3,300. The other $6,700 remains in the company's bank account.

They can claim $10,000 as a deductible expense in 2007, which reduces their tax bill by $3,300.
2008 We pay interest at 3% pa on the money deposited which is taxable in 2008. If RWT applies (because the company has no certificate of exemption) it will be deducted before the interest is paid.
2009 The company spends $10,000 on restoration work. They can claim a $3,300 refund.

This triggers assessable income of $10,000 (refund divided by 33% tax rate),whch is offset by the $10,000 environmental expenditure that the company incurs.
  Maximum and minimum deposits apply
Transitional rules apply to historical restoration provisions

 

Example 2
MAE Ltd has an accounting restoration provision in its audited financial statements for $2 million, made up of:
  • $1 million for dealing with contaminated soil
  • $0.5 million for the removal of plant and equipment to clean up the contaminated soil, and
  • $0.5 million for publicity costs to promote their "green image".
Both the soil clean-up costs and removal of plant and equipment will constitute restoration expenditure under Schedule 19 of the Income Tax Act 2007.

MAE Ltd can make an ERA payment for these costs.

No ERA payment can be made for the publicity costs as these do not constitute expenditure of a type listed in Schedule 19 of the Income Tax Act 2007.


Who can use the scheme?

Any company carrying on business in New Zealand and meeting the following conditions can use the scheme.

Expenditure

Expenditure for monitoring, avoiding, remedying or mitigating the detrimental environmental effects of the discharge of contaminants will be incurred in later income years. For full details go to Schedule 27 of the Income Tax Act 2007.

Expenditure should be capital expenditure (other than where section CB 8 applies). It cannot be of a revenue nature.

Accounts

Annual financial accounts must be prepared for external reporting purposes. They must be audited by a chartered accountant or an equivalent professional and contain no adverse audit comment about the accounting restoration provision.


Deposits

Making a deposit

Send us your payment with a letter stating:

  • the business name and IRD number
  • the year deduction is to apply
  • a calculation showing maximum deposit calculations.
  • a copy of your RWT certificate of exemption (if held).

For a deposit to be deductible in any income year, it must be made within six months of that year's balance date. We may allow a longer time on a case-by-case basis.

Send all deposits to:

Inland Revenue
PO Box 39050
Wellington

Maximum and minimum deposits

The minimum deposit is $1,000.

The maximum deposit is determined by multiplying the accounting provision for restoration by the applicable tax rate to give the "maximum account balance". It is the amount the maximum account balance exceeds the ERA account balance by. Transitional rules apply. See below.

Example of a maximum deposit calculation
ABC Ltd's accounting restoration provision is $10,000 in the annual accounts (this is not a historical provision). So $10,000 x tax rate of 33% equals $3,300.

The maximum account balance is $3,300.

ABC Ltd has previously made a deposit to the ERA scheme of $2000, so the ERA scheme balance is $2,000.

The maximum account balance of $3,300 exceeds the ERA scheme balance of $2,000 by $1,300.

The maximum deposit ABC Ltd can make to the ERA scheme this year is $1,300.

Transitional rules apply to historical provisions

If a deposit exceeds the maximum allowable deposit (see above), the excess will be returned with no interest paid and no tax deduction allowed.

Interest

Interest is calculated at 3% and is payable from the day after the deposit is made until the day before a refund is made.

Interest will be paid out on any account balance at 31 March each year and is assessable income in that year. Or interest from the preceding 31 March will be included with any refund being made. RWT will be deducted from the interest unless the business has a certificate of exemption.


Refunds

A refund can be requested when:

  • qualifying environmental restoration expenditure (Schedule 19 ITA 2007) has been incurred and the expenditure is not of a type listed in Schedule 19, or
  • when the accounting provision as shown in the annual financial accounts has decreased (where the ERA balance exceeds the maximum account balance for the income year).

The minimum refund is $1,000 (or the balance remaining in the account if less).

Refund requests

Send your request in writing to us and include the:

  • business name and IRD number
  • contact name and phone number
  • reason for refund, eg qualifying expenditure incurred
  • details of the expenditure incurred including a breakdown of costs (supporting evidence may be requested)
  • amount of the refund requested.

Send the request to:

Inland Revenue
PO Box 39090
Wellington


Transitional rules

Historical restoration liabilities are to be spread equally over the initial five years of the scheme.

Subsequent increases within those five years can be included with the historical portion for that specific year.

Example
A company has an existing environmental restoration provision in the 2006 year of $50,000. This increases to $60,000 in the 2008 year. The company tax rate is 33%. The maximum deposits to the scheme would be as follows:

2006 year   $50,000 divided by 5 x 33% equals $3,300

2007 year   $50,000 divided by 5 x 33% equals $3,300

2008 year   $50,000 divided by 5 plus $10,000 increase x 33% equals $6,600

2009 year   $50,000 divided by 5 x 33% equals $3,300

20010 year   $50,000 divided by 5 x 33% equals $3,300

Maximum and minimum deposits apply

You will find more information on the new rules for business environmental expenditure in the Tax Information Bulletin, Vol 17, No 7, (2005).

 

 


Date published: 18 Jun 2008

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