Two new IS’s issued for your comment

Inland Revenue (IR) has issued two new draft interpretation statements (IS) for your review and comment.

The first is PUB00444, ‘Income tax – Government payments to businesses (grants and subsidies)’, which provides guidance on the income tax treatment of government grants and subsidies paid to businesses. The IS is focused on how sections CX 47 and DF 1 of the ITA07 apply (with section CX 47 treating payments as non-taxable and section DF 1 treating expenses funded by such payments as non-deductible).

These “grant provisions” apply to payments made by local authorities, public authorities and public purpose Crown-controlled companies.

The draft IS presently concludes that:

• Any grant payment covered by section CX 47 that is received for general or specific expenses (which would normally be deductible or depreciable) is not taxable when it is derived. An equivalent deduction is denied to the business when the expenses are incurred. This treatment ensures tax neutrality of the payment.
• If a payment is made to reimburse expenditure that was incurred in a prior year, a business may need to amend previous assessments to reverse out any deductions previously claimed.
IR notes that businesses are expected to spend grant payments in accordance with the terms of the grant and within a reasonable time. Businesses must keep records to demonstrate that the payment has been spent in their business and that any corresponding deductions have not been claimed.

The deadline for comment is 16 May 2023.

The second IS is PUB00417, ‘Deductibility of holding costs for land’. The IS considers whether the land being taxed on sale is relevant to deductibility and looks to provide guidance surrounding bright-line scenarios – an area that has created some uncertainty.

IR’s present view is that holding costs incurred on land that is not revenue account property and is not rented out — but is taxed on sale — are not deductible. “Holding costs” refers to interest, rates and property insurance expenses and do not include capital improvement costs or expenses that relate to the use of the property.

The IS contains three primary areas of focus:

Nexus with income

For expenditure to be deductible, there must be a sufficient nexus between the expenditure and the derivation of income from the taxpayer’s income-earning process — section DA 1. The use to which property is put is relevant in determining whether holding costs satisfy the nexus requirement. The use of the property needs to be considered in each income year (as the use of the property may change over time).

The nexus requirement will be satisfied where:
• land is held for resale and therefore held on revenue account, and
• land is used to earn rental income during the relevant income year (regardless of whether land is held on revenue or capital account).
If the nexus requirement is satisfied, the interest limitation rules must be considered.


Once the nexus requirement is satisfied, it may be necessary to apportion holding cost expenditure. Holding cost expenditure is only deductible in part if, for example:
• the property is not used for income earning for all of the year, or
• if it is simultaneously used privately and to earn income (including to earn income on resale).

Mixed-use asset rules

If the mixed-use asset (MUA) rules apply, most deductible property-related expenses will be apportioned under a specific formula in the rules. If the land is held on revenue account, that is not a relevant use of the land for the apportionment formula.

The deadline for comment is 31 May 2023.