Statutory Interpretation: section CC 1 of the Income Tax Act 2007

Summary

The Court of Appeal has found that the words "other revenues" in s CC 1(2) of the Income Tax Act 2007 ("the Act") do not capture amounts that are capital in nature.

Impact

The decision clarifies the law in relation to payments derived from the use of land. The Court of Appeal has indicated that some of the payments received in similar circumstances to this case will now be captured by s CC 1B of the Act.

Facts

The respondent ("Vector Ltd") sold access rights to a tunnel for $50 million ("Southern Access Rights") and rights to its overhead corridor through which electricity is to be distributed for approximately $3 million ("Northern Access Rights") to the national grid operator, Transpower New Zealand Ltd ("Transpower"). The combined sum Transpower paid Vector was circa $53 million ("the Consideration").

Whether the Consideration was on capital or revenue account turned on whether it was deemed income under s CC 1 of the Act.

The High Court found that the Consideration was a non-taxable capital receipt (Vector Ltd v Commissioner of Inland Revenue [2014] NZHC 2069, (2014) 26 NZTC 21-096). The Commissioner of Inland Revenue ("the Commissioner") appealed that decision.

Decision

The Commissioner's appeal was dismissed on all grounds. The Court found that the High Court was correct in its analysis of the nature of the legal rights and responsibilities under the June 2010 agreement between Vector and Transpower. The Court dealt with Issues 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") and 2 (Whether the High Court erred in its interpretation of the term "other revenues" in s CC 1(2)(g), namely that it does not include amounts of a capital nature) together and Issue 3 (Whether the High Court erred in its analysis of the nature of the legal rights and responsibilities retained and/or given away by the agreement between Vector and Transpower) separately.

Issues 1 & 2

The Court concluded that there has never been a coherent, overarching scheme in s CC 1 (that the amounts derived by a landowner for letting another use its land is taxable). The Court finally noted that if Parliament had intended a scheme of the nature contended by the Commissioner, that is, capturing all amounts derived from specified uses of land short of disposal, it would have said so.

As for issue 2, the Court found that the lack of a coherent scheme or approach is evident from the listed amounts in s CC 1(2), noting that the listed amounts do not naturally fall into a group with common characteristics.

The Court made four points on this issue. In brief they are:

1. The listed amounts in subs (2) have been specifically selected. Their inclusion in a list does not create a general remit to treat all proceeds from the use of land as income, regardless of their treatment on ordinary taxation principles. Parliament could have used simple and clear language to describe a class of this nature. The items are diverse in nature. No ejusdem generis class emerges.
2. It is significant that Parliament chose, deliberately, the concluding words "other revenues" and not for instance, "other like amounts".
3. The best approach is to focus on the words "other revenues" read in their natural sense. In context, the words "other revenues" are there to capture revenue receipts.
4. The Commissioner's approach, that "other revenues" can include amounts that are on capital account, would effectively render subs (2) otiose as any "amount" derived as per subs (1) would be an "amount described in subsection (2)" however, that cannot have been intended.

The Court concluded that the High Court was correct in finding that the term "other revenues" used in s CC 1(2)(g) does not include amounts of a capital nature.

Issue 3

The Commissioner's alternative submission was that in reality the Consideration was disguised rent paid in advance as a lump sum.

In rejecting the Commissioner's submission the Court made the following points:

1. In terms of the Northern Access Rights, there are permanent impairments on Vector's ability to use its assets.
2. In terms of the Southern Access Rights, because the agreement between Vector and Transpower extended beyond the life expectancy of the tunnel, it was economically permanent.
3. There is no ability for Vector to regain its interest for non-payment of the Consideration, because that Consideration has already been paid.

The Court concluded that there was effectively permanent disposition of property interests.

The appeal and cross-appeals were dismissed.