"Other revenues" does not include capital amounts

Summary

Vector Limited ("Vector") received lump sum payments for a license to access its tunnel and a share in its easements. The Commissioner of Inland Revenue ("the Commissioner") considered the payments to be assessable as "other revenues" under s CC 1 of the Income Tax Act 2007 ("the ITA"). The High Court held that the payments were capital amounts, and that "other revenues" does not include amounts of capital.

Impact of decision

"Other revenues" in s CC 1(2)(g) of the ITA is not intended to tax amounts of a capital nature.

The Commissioner has appealed this decision.

Facts

The plaintiff (Vector) is an electricity distribution company. Vector owns two electricity distribution networks in the greater Auckland region and derives its income from lines charges. Vector owns various assets including an underground tunnel, easements and freehold land in what is known as the North Shore Transmission Corridor ("NSTC") through which Vector runs its cables.

Transpower New Zealand Ltd ("Transpower") manages and operates the national electricity transmission grid in New Zealand.

Transpower wished to use Vector's infrastructure to upgrade its works. Transpower entered into an agreement with Vector whereby Vector granted Transpower, among other things, a share of its easement rights in the NSTC "(Northern Easements") and an access right to occupy part of Vector's Tunnel ("Southern Access Right"). Transpower paid Vector $3,113,561.64 for the Northern Easements and $50,000,000.00 (plus GST) for the Southern Access Right (the payments).

In the 2011 and 2012 income tax years, Vector returned one-sixth of the payments, being $8,852,260.30 per year as income under s CC 1 of the ITA (Vector spread the payments over six years under s EI 7 of the ITA). Vector then issued a Notice of Proposed Adjustment proposing to adjust its assessable income on the basis that the payments were non-taxable capital receipts. After attending a conference, the parties agreed that the dispute should be truncated and the matter referred to the court for determination.

Decision

Faire J found that "other revenues" in s CC 1(2)(g) of the ITA did not include capital amounts (at [58]). He said that "other revenues" captured amounts that are income, but are not covered by s CC 1(2)(a)-(f). In support of this conclusion, his Honour pointed to the following factors:

1. the plain meaning of "revenue" is income (at [48]);
2. where Parliament intends to tax capital it must use clear language to do so (at [48]);
3. the general purpose of the ITA is to tax income. An amount of capital is not otherwise included in a person's income unless Parliament has intended that to be so by a specific provision - New Zealand does not have a general all-purpose capital gains tax (at [54]);
4. treating "other revenues" as meaning any amount derived from a lease, license or easement would make s CC 1(2) redundant, but the Courts must give effect to the words Parliament has used (at [55]); and
5. the wider context suggests that payments for the grant or transfer of certain rights to land were not included in s CC 1 (at [57]).

Therefore, whether s CC 1 of the ITA applied in this case was answered by determining whether the payments were of a capital or income nature. In deciding that the payments were capital, Faire J applied the principles from BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia [1966] AC 224 (PC) and Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988] 2 NZLR 736 (CA).

Faire J found that the payments from Transpower were not part of Vector's income-earning process (at [58]). His Honour accepted Vector's submission that it had effectively permanently given up part of its income-producing asset in exchange for a lump sum payment (at [69]).

Faire J noted that the Commissioner was correct that Vector had not legally disposed of its rights to those parts of the tunnel and NSTC that are subject to the agreement with Transpower. However, his Honour found that this was not necessary and that the payments were of a once and for all nature producing advantages to Transpower which were enduring. His Honour concluded that the payments were of a capital nature (at [69]).

Other issues

Although the finding that the payments were not "other revenues" for the purposes of s CC 1 of the ITA was enough to dispose of the case, Faire J went on to briefly express his views on the other two issues.

Is the payment derived "from a lease, license or easement affecting the land"?
Faire J found that the rights which were acquired under the easements and the licence are inseparable from the easements and the licence (at [84]). The payment for those rights was, therefore, "derived from" the licence or easements.

Is the Northern Consideration Amount able to be apportioned?
Faire J was not satisfied that Vector had discharged its onus of providing an appropriate basis for apportionment even if apportionment was possible (at [85]). He said that if it had been necessary to determine the apportionment issue, there may have been justification for granting leave to address further submissions and evidence on it.