In recent years, geothermal power has become more competitive with other forms of power generation in New Zealand. The government wants to remove hurdles to further geothermal developments as the predicted gas supply shortfall later this decade looms large and highlights the necessity of electricity supply security.

But taxpayers in the New Zealand power generation industry have identified two tax-related problems.

The expenditure involved in exploration drilling when the geothermal well is not subsequently used for production purposes is non-deductible; and expenditure in drilling a geothermal well that turns out to be unusable in a productive field that when the resulting well is unusable is also non-deductible.

The paper suggests a range of possible solutions. Inland Revenue's proposals include:

• Defining an "exploration well" as a well drilled before a company applies for resource consents to develop a geothermal field;

• Enabling the cost of exploration wells to be amortised at an annual rate of 11% of the costs of drilling;

• Allowing tax deductions from the date that well completion testing begins, with failed exploration drilling able to be amortised at the same rates as successful wells;

• Expenditure on drilling geothermal wells incurred after the date of the first application to develop a geothermal field will be capitalised and depreciated under normal depreciation rules;

• Write-offs for the value of a geothermal well in limited circumstances (wells drilled in the production phase and not used and written off for accounting purposes; and losses where expenditure has been incurred on wells when the field is subsequently abandoned and the rights to develop or the well itself were sold).

The changes would be backdated to the 2003-4 income year.

bryan.gundersen@kensingtonswan.com

Kensington Swan Lawyers has experts in both the taxation and energy areas. For further information on Kensington Swan see www.kensingtonswan.com.