High Court considers whether a geothermal turbine hall is a building for depreciation purposes

Summary

Mercury challenged the 2012 – 2015 income years to determine whether the turbine halls at its Kawerau and Nga Awa Purua geothermal powerstations ("powerstations") were buildings and therefore subject to a depreciation rate of 0%.

Mercury asserted that the turbine halls were to be treated as part of the gantry cranes which are situated within the turbine halls, and therefore were depreciable at a rate of 9.6%.

The Court found in favour of the Commissioner.

Impact

The judgment is significant as it contains the first judicial analysis in New Zealand of what constitutes a building in the modern depreciation context (which has been in force since 1993) and sets out the order of the questions to be asked. It affirms the Commissioner's published approach that the definition of building is its ordinary and natural meaning.

The Court has concluded as a matter of fact that the geothermal turbine halls at Kawerau and Nga Awa Purua are buildings.

Facts

The powerhouse, which forms part of each powerstation, incorporates a turbine hall and any attached annex housing electrical equipment and other plant (Mercury NZ Limited v The Commissioner of Inland Revenue [2019] NZHC 1524 ("Mercury v The Commissioner") [7]). The turbine halls house the main generating plant (turbines, generators and other equipment) and a gantry crane. Mercury accepted the Commissioner's assessment that the electrical annex to the turbine hall was building with a depreciation rate of 0%.

Prior to 1 July 2011, the Kawerau and Nga Awa Purua turbine halls were depreciated, as "structures (default class)" with an estimated useful life ("EUL") of 50-years, at a rate of 4%. The gantry crane and the foundation for the turbines and generators (known as the TG foundation which is set within the turbine hall but is a separate structure) were not separately depreciated but capitalised as part of the "structures (default class)" at the 4% rate.

When the Taxation (Budget Measures) Act 2010 ("the 2010 Budget Act") came into force, the depreciation rate for a building with an EUL of 50-years or more was set at 0% with effect from the 2012 income year. This change led to the issue in these proceedings. The gantry crane rate was set at 9.6%.

Post 2010 Budget Act and following considerable industry consultations, on 25 March 2015 the Commissioner issued Provisional Determination PROV 26: Depreciation Rate for hydroelectric powerhouses, which provides that a hydroelectric powerhouse has an EUL of 100 years and a provisional depreciation rate of 2%.

Discussions continued with the electricity sector who had geothermal power stations and on 23 February 2016, the Commissioner issued Provisional Determination Rate: PROV 27 Thermal and Geothermal Powerhouses which, applied retrospectively back to the 2012 income year, declared that geothermal powerhouses were buildings with an EUL of 50 years and a depreciation rate of 0%.

Decision

Question 1: What is the item?

The Court concluded that there was only one item – the turbine hall was one structure (neutral term) and therefore one item for the purpose of this inquiry Mercury v The Commissioner[31]). The evidence before the Court from expert witnesses from both sides concluded that the three elements initially referred to by Mercury (as the gantry crane support structural system, the turbine hall base structure and the cladding system) are integrated and interdependent; part of one unit ([32]).

Question 2: Is the turbine hall a building?

The Court noted that Mercury could not realistically dispute the fact that the turbine hall has an EUL of 50-years or more as its own design specifications provided for a physical/design life of 50-years or more ([35]). Furthermore, Mercury's own asset register specifically listed the turbine halls as having an EUL of 50-years ([35]).

The definition of "building" in the Income Tax Act 2007 ("the Act") is exclusionary only. (The exclusion of grandparented structure was incorporated into the Act by the 2010 Budget Act and the exclusion for commercial fitout was inserted by the Taxation (GST and Remedial Matters) Act 2010 – s 132(4)). The Court agreed with the Commissioner that "building" in the Act is to be given its conventional meaning and that some assistance in discerning the intended meaning can be gained from what is excluded from the definition ([39]). This approach made it reasonably clear that buildings would include industrial buildings and buildings that would be considered to be of a specialised industrial nature ([40]).
The Court discussed the definition for "plant" and "commercial building" and concluded that the "combination of these provisions makes it clear that anything that is structural in relation to a building, even if it would otherwise be plant, is not plant. It is part of the building for depreciation purposes" ([44]).

In considering the definition of "temporary building", (The Court considered the definition as defined in the Income Tax Act 2007 since prior to the 2010 Budget Act and also amended by the Taxation (GST and Remedial Matters) Act 2010) the Court said it "makes it clear that even structures erected and used to house specific plant and that are to be demolished once the plant is removed, would fall in the intended definition of building, but are purposefully excluded because they are only useful for the life of the plant" ([46]).

Ordinary and natural meaning

Justice Hinton accepted that the approach to take for answering the question of what was a building for the purposes of depreciation under the Act, was the "ordinary and natural meaning of the word" particularly when nothing in the legislation gives any signal that a building for purposes of the depreciation provisions is anything other than a building in the ordinary sense of the word ([48]).

The Court acknowledged the hypothetical view of the reasonable lay observer which has been useful for other Courts. Justice Hinton said the turbine hall "certainly looks like a building from the outside ([54]), a concession Mr McKay accepted on a "first blush" basis ([55]) before stressing the need to look both inside and outside the turbine hall ([56]). The Court said that "a reasonable observer looking both from inside and outside the turbine hall would say it is a building" ([57]) and disagreed that the common-sense approach should be given low priority ([58]).

Other considerations

Mercury argued that there was no material distinction between a hydroelectric powerhouse and a geothermal powerhouse. The Court did not have information in front of it to draw a meaningful comparison between the two regardless of what reliance was placed on PROV 26 ([89]). However Justice Hinton, after acknowledging that there are likely material differences between the two, went further and said that as hydroelectric powerhouses were situated in rivers, have water flowing through them or part of them and are attached to the dam, this tended to suggest that the hydroelectric powerhouse would fall into the limited category of structures that are integrally involved in the production process ([90]).

Mercury treats the geothermal turbine hall at Rotokawa as a building for which 0% depreciation is claimed. The Court agreed with the Commissioner that Mercury's tax treatment of the three turbine halls appeared to be inconsistent but was not prepared to put any weight on this point ([91]).