Commissioner of Inland Revenue v Vector Ltd
| Jurisdiction | New Zealand |
| Judge | Kós J |
| Judgment Date | 12 August 2016 |
| Neutral Citation | [2016] NZCA 396 |
| Docket Number | CA538/2014 |
| Court | Court of Appeal |
| Date | 12 August 2016 |
[2016] NZCA 396
Harrison, French and Kós JJ
CA538/2014
IN THE COURT OF APPEAL OF NEW ZEALAND
Appeal by the Commissioner of Inland Revenue against the High Court's (HC) finding that the proceeds from a sale of access rights to a tunnel and overhead corridor, through which electricity was to be distributed, was a non-taxable capital receipt and did not attract income tax liability — the respondent sold the access rights to the national grid operator, Transpower — Transpower paid the respondent $53million — the Commissioner said that the consideration was deemed to be income by CC (2)(g) (“other revenues”) was income — whether s CC 1 included in a taxpayer's income amounts “derived … from” the use of “land” that it “owned” — whether the HC erred in its interpretation of the term “other revenues” as used in s CC 1(2)(g) — whether the Consideration was disguised rent paid in advance as a lump sum and it was received for the use of Vector's “land” by Transpower.
P H Courtney and J R Burns for Appellant
L McKay, S E Fitzgerald and F M Ward for Respondent
A The appeal and cross-appeal are dismissed.
B The appellant must pay the respondent's costs for a standard appeal on a band A basis together with usual disbursements. We certify for second counsel.
REASONS OF THE COURT
(Given by Kós J)
Vector Ltd sold access rights to a tunnel and overhead corridor through which electricity is to be distributed to the national grid operator, Transpower New Zealand Ltd. Transpower paid Vector $53 million. Is this amount assessable for income tax or is it a non-taxable capital receipt? This turns on the interpretation of s CC 1 of the Income Tax Act 2007.
Vector owns two key assets in the Auckland electricity distribution system: an underground tunnel (Tunnel) and the North Shore Transmission Corridor (NSTC).
-
(a) The Tunnel runs south from a central city substation to Penrose. It is 60 metres underground and three metres in diameter. It houses cables. Vector holds a series of leases of the subsoil and electricity rights in gross over certain titles.
-
(b) The NSTC runs from an Albany substation to Wairau, a distance of about 8.4 kilometres. It houses overhead cables. Vector holds easements over most of the NSTC, and freehold land over a small proportion. Vector also holds a designation, Designation 179A, which authorises the placement of transmission lines along the NSTC.
Vector entered into an agreement with Transpower in June 2010 whereby Transpower could use the Tunnel and NSTC. Specifically, Vector was to:
-
(a) transfer to Transpower a two-thirds share in the NSTC easements;
-
(b) grant Transpower easements over Vector's freehold land in the NSTC;
-
(c) transfer Designation 179A to Transpower;
-
(d) grant Transpower a licence to access and occupy some of the width of the Tunnel; and
-
(e) grant easements to distribute electricity to the entry and exit points of the Tunnel.
The agreement runs until June 2101. As consideration, Transpower paid approximately $3 million for the NSTC access (Northern Consideration) and $50 million for the Tunnel access (Southern Consideration). The combined sum of $53 million we refer to as the Consideration.
Vector says the Consideration is a non-taxable capital receipt. The Commissioner says it is deemed to be income by s CC 1.
Section CC 1 reads:
CC 1 Land
Income
(1) An amount described in subsection (2) is income of the owner of land if they derive the amount from—
(a) a lease, licence, or easement affecting the land; or
(b) the grant of a right to take the profits of the land.
Amounts
(2) The amounts are—
(a) rent:
(b) a fine:
(c) a premium:
(d) a payment for the goodwill of a business:
(e) a payment for the benefit of a statutory licence:
(f) a payment for the benefit of a statutory privilege:
(g) other revenues.
…
The following definitions from s YA 1 are relevant also:
YA 1 Definitions
In this Act, unless the context requires otherwise,— estate in relation to land, interest in relation to land, estate or interest in land, estate in land, interest in land, and similar terms—
(a) mean an estate or interest in the land, whether legal or equitable, and whether vested or contingent, in possession, reversion, or remainder; and
(b) include a right, whether direct or through a trustee or otherwise, to—
(i) the possession of the land (for example: a licence to occupy, as that term is defined in section 121A(1) of the Land Transfer Act 1952):
(ii) the receipt of the rents or profits from the land:
(iii) the proceeds of the disposal of the land; and
(c) do not include a mortgage
interest,—
…
(d) in relation to land, interest in land, estate or interest in land, and similar terms are defined under the definition of estate
land—
(a) includes any estate or interest in land:
(b) includes an option to acquire land or an estate or interest in land:
(c) does not include a mortgage:
…
lease—
(a) means a disposition that creates a leasehold estate:
…
leasehold estate includes any estate, however created, other than a freehold estate
own,—
(a) for land, means to have an estate or interest in the land, alone or jointly or in common with any other person:
…
possession includes a use that is in fact or effect substantially exclusive
Faire J summarised the two key issues thus:
-
(a) Whether the Consideration is “other revenues” in terms of s CC 1(2)(g).
-
(b) Whether the Consideration is “derived … from a lease, licence or easement affecting the land” in terms of s CC 1(1)(a). 1
The Judge began by noting the words “other revenues” on their face do not cover capital amounts because the plain meaning of “revenue” is “income” and where Parliament intends to tax a capital sum it must use clear language. 2 This was consistent with the purpose of the Act, which is not to introduce an all-purpose capital gains tax. 3 The Judge accepted Vector's submission that treating “other revenues” as meaning any amount derived from a lease, licence or easement would make s CC 1(2) redundant. 4
The Judge rejected the Commissioner's submission that the recent enactment of ss CC 1B and CC 1C shows “other revenues” had a broad coverage prior to the introduction of those sections. 5 Those new provisions say consideration for agreements to grant, renew, extend, transfer a lease or licence or to surrender or terminate a lease or licence are income of the payee. The Commissioner conceded that the enactment of those provisions could show the opposite — namely the Act did not previously make such amounts assessable and the amendment was made to fill what was perceived to be a gap. 6
The Judge concluded “other revenues” is not intended to tax amounts of a capital nature, but rather captures amounts that are of an income nature and not covered by s CC 1(2)(a)–(f). 7
The Judge therefore went on to consider whether the Consideration is capital or income. He said it was capital because Vector had given up part of its income producing assets and the payments were of a once-and-for-all nature producing an enduring advantage to Transpower. Relevantly, the life of the Tunnel is less than the period of the agreement and the NSTC easements continue beyond the termination date. 8
This meant s CC 1 did not apply to the Consideration. For completeness, however, the Judge went on to consider whether the Consideration was “derived from a lease, licence or easement affecting the land”.
Vector submitted in the High Court the Consideration was “derived from” the act of dealing with licences and easements, rather than from the licences/easements themselves. Section CC 1 did not apply for that reason.
The Judge rejected this. The word “from” did not have the wide meaning of “relating to” or “in relation to”. 9 The Judge relied on Court of Appeal decision in Romanos Motels Ltd v Commissioner of Inland Revenue. 10 There the taxpayer granted a lease of motel land and buildings to the lessee. In addition to rent, the lessee also paid to the taxpayer £5,000 as purchase price for the “goodwill and lease of the motels”. The Court said the £5,000 was “derived by the owner of land from” a lease, licence or easement affecting the land. 11 The goodwill of the motels was “inseparably attached to the premises”. The Court observed that for the payment for goodwill to be derived from the lease there would need to be a “real nexus” between
Applying those tests of “real nexus” and “inseparable attachment”, Faire J said the rights acquired by Transpower under the easements and licence were inseparable from those easements and licence. Therefore the Consideration was “derived from” the easements and licence. 13
Finally, the Judge noted that the question of whether there should be some apportionment of the Consideration between deemed assessable income under s CC 1 and non-taxable capital receipts did not arise. In any event, he was not satisfied Vector had shown an appropriate basis for making an apportionment. 14
The issues on appeal are these:
-
(a) Issue 1: Whether the text of s CC 1 and its context in the scheme of the Act establish that the purpose of the section is to include in a taxpayer's income amounts “derived … from” the use of “land” that it “owns” (it not being in dispute that Vector is the “owner” of “land” for the purposes of s CC1).
-
(b) Issue 2: Whether the High Court erred in its interpretation of...
To continue reading
Request your trial