Queenstown Airport’s eastern runway safety area found not to be depreciable under the Income Tax Act 2007
2016 case note – High Court confirmed CIR's view that eastern runway and safety area not depreciable - schedule 13, airport runways, hardstanding, roads.
The Court dismissed Queenstown Airport Corporation Limited's tax challenge and confirmed the Commissioner of Inland Revenue's ("the Commissioner") view that the eastern runway and safety area ("East RESA") was not depreciable.
The decision provides useful commentary on the parameters of the items listed in sch 13, specifically airport runways, hardstandings, and roads. It confirms that unless a runway and safety area ("RESA") can satisfy one of the existing criteria in sch 13, it will not be depreciable under sch 13. Permanent embankments will be considered land and so not depreciable.
In April 1998 the International Civil Aviation Organisation set as a new standard the creation of a minimum 90 metre RESA at the end of airport runways used for international flights. That standard was implemented in November 1999, and adopted into New Zealand law in October 2006.
In order to provide an East RESA of the Queenstown Airport runway, where there was a steep drop-off down to the Kawerau/Shotover River delta 45 metres below, the plaintiff constructed an engineered fill embankment out from the existing cliff at a cost in excess of $8.5 million.
The plaintiff filed its income tax returns for the 2012 and 2013 income years on a conservative basis, namely the plaintiff did not claim depreciation deductions for the East RESA. Instead, the plaintiff issued Notices of Proposed Adjustment ("NOPAs") proposing to amend its 2012 and 2013 returns to include amounts of depreciation deduction. The amounts claimed by the plaintiff were as follows:
On the basis that the East RESA is a runway (the published depreciation rate being 4% on a straight line value basis (SL)):
- $417,078.34 for the 2012 income year; and
- $419,062.66 for the 2013 income year.
Alternatively, on the basis that the East RESA is hardstanding or road (the published depreciation rate being 3% SL):
- $312,808.75 for the 2012 income year; and
- $314,062.66 for the 2013 income year.
The Commissioner notified the plaintiff that she rejected the plaintiff's NOPAs.
His Honour noted that by the end of the hearing it appeared that the plaintiff did not contest whether the embankment and the East RESA constituted land. His Honour found it nevertheless desirable to note the Commissioner's argument and his view on it.
His Honour held there was an air of unreality in characterising the very large amount of compacted engineered fill as either a chattel or a fixture. Instead, applying the principles in Elitestone Ltd v Morris  2 All ER 513 he was satisfied that the degree and purpose of the annexation of the embankment, comprised of compacted engineered fill, to the 45m bluff at the end of the runway strip plainly indicate that the embankment (and the East RESA atop it) became part and parcel of the plaintiff's land.
His Honour was unable to accept that, beyond the ambit of the individual listed items themselves, sch 13 has a penumbra of meaning such that a land improvement could qualify as depreciable property even though it did not in fact come within any one of the 18 listed items purposively construed. It is not sufficient for such a land improvement to be "similar to" or "consistent with" (say) reservoirs, dams, bridges and tunnels. If a land improvement does not actually come within one of those specified depreciable land improvements it is not open to a taxpayer to contend that, by analogy with some listed items, the land improvement falls within the general purview of sch 13, and it is not the function of the Court to recognise additional new items in sch 13.
Is the East RESA within the term "airport runways"?
His Honour inferred that in selecting the phrase "airport runway" for inclusion in sch 13, the legislature was intending to identify runways comprising paved areas constructed in such a manner as to safely cater for the landing and take-off of the kind of aircraft engaged in the delivery of passenger and cargo services. A RESA could only fall within the phrase "airport runway" as used in sch 13 if the RESA was constructed to the standard required for an airport runway. The East RESA is not so constructed, and so His Honour concluded that the East RESA does not come within the phrase "airport runways" in sch 13 and is not thereby excised from the ambit of "land" in s EE7(a).
Is the embankment within the term "airport runways"?
His Honour found that even if the East RESA itself, which lies atop the embankment, qualified as one of the specified depreciable land improvements in respect of airport runways (and likewise hardstanding and roads), the underlying embankment, which was constructed to enable the East RESA to be provided, is captured by the "land" exclusion and not encompassed by the specified depreciable land improvement.
Is the East RESA within the term "hardstanding"?
His Honour accepted the Commissioner's submission that hardstanding refers to an area that has been paved or surfaced with material that is both strong and hard. While the subgrade of the embankment was compacted, it is not hardstanding. The fact that RESAs are designed so that jet aircraft will sink into their surface is inconsistent with their being categorised as hardstanding. Further, if a RESA was to be used for parking aircraft or other vehicles, other than for emergency use, it might reasonably be expected to have a hard surface. However, parking is not permitted in the RESA.
Is the East RESA within the term "roads"?
His Honour found that the function of the East RESA was not as a road, save to the extent that it is used as a service access road. Depreciation could only be claimed to the extent of the formed access road.
Might the East RESA reasonably be expected to decline in value?
So far as the relevant "identifiable asset" was concerned, his Honour did not accept that the identifiable asset comprised the entirety of the plaintiff's runway system. In his Honour's view the identifiable asset is no more extensive than the embankment and the East RESA.
Any damage to the East RESA is most likely to occur only in the rare event of an aircraft undershooting or overrunning the runway. Even then it is to be expected that only a small portion of the top layer of the embankment would be damaged. The evidence was that such damage could be repaired by grading and resowing grass, which is minor work similar to regular maintenance. His Honour concluded that the plaintiff had not established that the East RESA and the embankment are property that, in normal circumstances, might reasonably be expected to decline in value while they are used or available for use.
His Honour dismissed the challenge and found the RESA was not a depreciable asset.
Income Tax Act 2007