Income tax - deductibility of expenditure on cattle stops

All legislative references are to the Income Tax Act 2007 unless otherwise stated.

This question we've been asked applies in respect of s DO 1(1)(f).

The item "Expenses Allowable To Farmers Who Convert To Tanker Collection" was published in Public Information Bulletin No 20, p 11 (March 1965) ("the old PIB item"). This QWBA updates and replaces the parts of the old PIB item that relate to new cattle stops. The current relevance of this information was identified during an ongoing review of content published in Public Information Bulletins and Tax Information Bulletins before 1996. The Commissioner's view on the other parts of the old PIB item that are still relevant are set out in the following items: QB 12/04 - Income tax - deductibility of expenditure on widening or metalling a farm access road or track; Operational Statement 007 - Income tax treatment of certain expenditures on conversion of one farming or agricultural purpose to another; and Interpretation Statement IS0025 - Dairy farming - deductibility of certain expenditure. As a result, the old PIB item is no longer current and should not be relied on. For more information about the review, please see "Review of Public Information Bulletins" in Tax Information Bulletin Vol 23, No 1 (February 2011).

Question

1. A farmer is constructing a new cattle stop as part of a fence where it crosses a farm track. How is the expenditure treated for income tax purposes?

Answer

2. Where a cattle stop is constructed in an opening in a fence, the cost of constructing the cattle stop is deductible in the year in which it is incurred. The deduction is available under s DO 1(1)(f) as expenditure incurred on the construction on the land of fences for farming or agricultural purposes (assuming the expenditure was incurred in carrying on a farming or agricultural business on land in New Zealand).

Explanation

3. Specific farming deductions are available in subpart DO. Section DO 1 (Enhancements to land, except trees) allows an immediate deduction for the expenditure incurred in constructing fences. Section DO 1 overrides the capital limitation. Section DO 1(1) relevantly provides:
   
   • DO 1 Enhancements to land, except trees
     Deduction
     1. A person is allowed a deduction for expenditure that they incur on the following in carrying on a farming or agricultural business on land in New Zealand:
        ...
        6. the construction on the land of fences for farming or agricultural purposes, including buying wire or wire netting for the purpose of making new or existing fences rabbit-proof:

4. Assuming the expenditure was incurred in the carrying on of a farming or agricultural business on land in New Zealand, the ability to deduct the expenditure incurred in constructing the cattle stop under s DO 1(1)(f) depends on whether the cattle stop falls within the meaning of "construction on the land of fences" in that section.

What is a cattle stop?

5. The New Zealand Oxford Dictionary (Oxford University Press, Australia, 2005) defines the term "cattle grid" (another term for "cattle stop") as follows:
   
   • cattle grid (on a road, in an opening in a fence) a set of metal rails fixed on the ground over a shallow trench and so spaced as to allow vehicles to pass over but not cattle, sheep, etc.

6. This suggests that a cattle stop is an alternative to a gate: it prevents stock from leaving an enclosed area but allows vehicles and people to pass through without the need to open and close a gate. When located in an opening in a fence, both (closed) gates and cattle stops continue the line of barrier provided by a fence.

What is a "fence"?

7. The Shorter Oxford English Dictionary (6th ed, Oxford University Press, New York, 2007) relevantly defines "fence" as follows:
   
   • fence noun...3 a railing or barrier constructed of posts of any of various materials connected by wire, planks, etc., used to enclose and prevent entry to and exit from a field, yard, etc.

8. The dictionary definition of "fence" shows that the ordinary meaning of the word "fence" is an upright structure that is comprised of posts (of any of various materials) connected by wire or wood. The definition also shows that the purpose of a fence is to enclose an area to prevent or control access to and from that enclosed area.

9. Halsbury's Laws of England, (5th ed, 2011) Vol 4, Boundaries, in relation to the rights, duties and liabilities of owners of fences, provides the following definition of fences at [350]:
   
   • Although fences are frequently used to mark the situation of boundaries, none the less they are primarily guards against intrusion, or barriers to prevent persons or animals straying out, and therefore in this sense the term includes not only hedges, banks, and walls, but also ditches. But an external party wall forming part of a building and alongside or on the boundary of land is not usually regarded as a fence.

10. The word "fence" is also defined in other New Zealand Acts. For example, the Fencing Act 1978 provides the following definitions:
    
    • Fence means a fence, whether or not continuous or extending along the whole boundary separating the lands of adjoining occupiers; and includes all gates, culverts, and channels that are part of or are incidental to a fence; and also includes any natural or artificial watercourse or live fence, or any ditch or channel or raised ground that serves as a dividing fence.
      Adequate fence means a fence that, as to its nature, condition, and state of repair, is reasonably satisfactory for the purpose that it serves or is intended to serve

11. While not decided in a tax context, the following cases are useful because they discuss the ordinary meaning of the word "fence".

12. In the New Zealand Environment Court case of Collins v Wooff [2010] NZEnvC 227, the court was prepared to contemplate a wider range of fences than typical post and wire fencing when considering what the phrase "standard rural fencing" meant. This was in the context of a resource consent that contained a fencing covenant requiring the defendant to erect only "standard rural fencing" on his property. However, the defendant's case failed because he could not show that the 8 metre stone wall he had erected next to his driveway performed the function of a fence. The court was not persuaded that the fencing covenant necessarily ruled out stone walls because such structures were commonly used as fences on farms in other parts of New Zealand. However, in this case, the wall was not a "fence" because it did not form a barrier or enclose anything. In the court's view (seemingly based on the dictionary definition) the function of a fence is to form a barrier or enclose an area of land.

13. Similarly, in Kontikis v Schreiner (1989) 16 NSWLR 706, 68 LGRA 301 the Court of Appeal of the Supreme Court of New South Wales considered that for a structure to be a fence, the structure must not merely bound land in fact but must be there functionally or essentially for that purpose. In addition, the court considered that a "fence" may have overlapping purposes or perform other functions.

14. In Lahey v Hartford Fire Insurance Co [1968] OR 727 at [6], the Ontario High Court of Justice considered that "fence" referred to "a structure which encloses wholly or partially some piece of property so as to impede ingress and egress. It may be composed of anything so long as it creates a line of obstacle serving this purpose." This was confirmed by Clancy J in the British Columbia Supreme Court in the case of Barrow v Landry [1998] BCJ No 1601.

15. In addition, in Barrow v Landry, Clancy J stated at [21] to [22]:
    
    • To take the narrow view suggested by Mr. Landry would not be of assistance in attaining the objects of the Act. I see no reason to limit the definition of "fence" as that word is used in the Act to some upright, above ground, structure that encloses an area of property. I conclude that a structure of any kind, provided it serves the purpose of either enclosing property or separating contiguous estates is a fence within the meaning of the Act. I find as well that it is unnecessary, as contended by Mr. Landry, that the fence be constructed for the specific purpose of dividing the property into two distinct portions. It seems to me to be sufficient if the structure serves that purpose. [Emphasis added]

16. In the old case of Ellis v Arnison (1822) 1 B&C 70, 107 ER 27, the court considered whether a ditch was a fence according to an Inclosure Act. The court concluded (at 74):
    
    • Whatever provisions the General Inclosure Act may have very wisely introduced, yet we cannot say that a ditch may not be in legal construction a fence; and if it may be, then the jury in this case have found that this ditch was a sufficient fence, in the judgment of the commissioners. The verdict must, therefore, be entered for the defendant on this issue. [Emphasis added]

17. In Helding v Davis [1911] VLR 74 the plaintiff and the defendant owned adjoining blocks of land. Mr Davis's land was enclosed on three sides by post and wire fences, and on the fourth side by a gully 8 to 15 feet deep. The gully was impassable to ordinary cattle, except at one place where a track had been cut across it and fenced with barbed wire. The gully formed the boundary between the plaintiff's and defendant's lands. One of Mr Helding's heifers was found in Mr Davis's crop of peas. Mr Davis impounded the heifer and refused to release it to Mr Helding until Mr Helding paid the trespass rate for "trespasses on land enclosed with a substantial fence". Mr Helding argued that the gully was not a substantial fence and therefore a lesser trespass rate was payable (for trespass on land not tillage land enclosed with a substantial fence). Hood J in the Supreme Court of Victoria decided:
    
    • I cannot say that my mind is entirely free from doubt, but I think that the justices were at liberty to say that this was a fence....The authorities referred to by Mr. Ah Ket show that a ditch may be a fence, and the Inclosure Act referred to in Ellis v Arnison speaks of land bounded "by any river or other sufficient fence." I think, therefore, the word fence is used in the Pounds Act 1890 to describe an obstruction to the passage of trespassing cattle of such a kind as in the opinion of the magistrates is a substantial barrier to their ingress.

18. In Bass Coast SC v Coastal Estates Pty Ltd [2008] VCAT 1518, the Victorian Civil and Administrative Tribunal cited the above passage in City of Greater Geelong v Herd and stated (at [57]):
    
    • The cases referred to included discussion of the purposes of fences including that they are normally to enclose specific areas, or to define them. Such areas may not be limited to the area within a title boundary. Orchard fences, internal paddock fences, cattleyards, tennis courts and so on may enclose particular areas. [Emphasis added]

19. These cases show that the purposes of a fence include any (or a combination) of the following:
    
    • to enclose an area;
    • to define boundaries; and
    • to provide a barrier and prevent ingress or egress.
    
    In addition, these cases show that the ordinary meaning of "fence" need not be limited to some upright, above ground, structure, and that any kind of structure may potentially be a fence as long as it forms a barrier or encloses land (Barrow v Landry; Lahey v Hartford Fire Insurance Co.).

Does a cattle stop come within the meaning of "construction on the land of fences" under s DO 1(1)(f)?

20. The purpose of a cattle stop is to form a barrier for stock while still allowing people and vehicles access to the area without the need to open and close a gate. The main function of a cattle stop, when used in conjunction with a fence, is to form a barrier for stock and prevent their escape (even though people and vehicles can still enter and exit the enclosed area). In the context of a farming or agricultural business, a means of entry and exit is generally a necessary part of a fenced enclosure.
21. Section DO 1 refers to certain costs incurred in carrying on a farming or agricultural business in New Zealand. Section DO 1(1)(f) allows a deduction for expenditure incurred on the construction on the land of fences for farming or agricultural purposes. Apart from the expenditure needing to be for the "construction" of fences, the provision neither places any restrictions on, nor provides any further guidance as to, the meaning of "fence". As discussed above, dicta in the case law suggest that the ordinary meaning of "fence" need not be limited to upright, above ground structures (Barrow v Landry, Ellis v Arnison, Helding v Davis). Based on the case law, it would seem that a structure, such as a cattle stop, may come within the meaning of "fence" as long as it encloses land or forms a barrier to ingress or egress. However, it is not entirely free from doubt. In such cases it is necessary to consider the scheme and purpose of the legislation.
22. The Commissioner considers that there is nothing in the Act to suggest that a cattle stop constructed in an opening of a fence cannot come with the meaning of "construction on the land of fences" in s DO 1(1)(f). When a cattle stop is used, as part of a fence, to bar stock from entering and exiting a fenced enclosure, the Commissioner considers that the cattle stop is sufficiently fence-like to come within the meaning of "construction on the land of fences". This is because, in that situation, the cattle stop is an integral part of the barrier formed by the fence.
23. In addition, a cattle stop may be considered an alternative to a gate. A gate, when shut, continues the line of a fence and bars entry or exit. A cattle stop also continues the line of the fence, but it bars only livestock from entering or exiting the fenced area. In addition, the definition of "fence" in the Fencing Act 1978 shows that gates (and, by analogy, cattle stops) may be considered to come within the meaning of "fence" in some contexts. 24. A strict view of the meaning of the word "fence" might not include cattle stops (or gates). However, when the case law and the scheme and purpose of the legislation is considered, the Commissioner is satisfied that a wider definition applies in s DO 1(1)(f), provided that the cattle stop is used "to fence" and is part of a fence. Where a cattle stop is constructed in an opening in a fence, expenditure on the cattle stop will be deductible under s DO 1(1)(f) as being "construction on the land of fences".

References

Related rulings/statements
IS0025 "Dairy farming - Deductibility of certain expenditure" Tax Information Bulletin Vol 12, No 2 (February 2000)

Subject references
Cattle stop
Deductibility
Farming expenditure
Fence

Legislative references 
Income Tax Act 2007, s DO 1(1)(f)

Case references 
Barrow v Landry [1998] BCJ No 1601
Collins v Wooff [2010] NZEnvC 227
Ellis v Arnison (1822) 1 B&C 70, 107 ER 27
Helding v Davis [1911] VLR 74
Kontikis v Schreiner (1989) 16 NSWLR 706, 68 LGRA 301
Lahey v Hartford Fire Insurance Co [1968] OR 727