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Commissioner of Inland Revenue v Vector Limited [2016] NZCA 396 (12 August 2016)

Last Updated: 18 August 2016

IN THE COURT OF APPEAL OF NEW ZEALAND
BETWEEN
 Appellant
AND
 Respondent
Hearing:
5 April 2016
Court:
Harrison, French and Kós JJ
Counsel:
P H Courtney and J R Burns for Appellant L McKay, S E Fitzgerald and F M Ward for Respondent
Judgment:


JUDGMENT OF THE COURT

  1. The appeal and cross-appeal are dismissed.

  1. The appellant must pay the respondent’s costs for a standard appeal on a band A basis together with usual disbursements. We certify for second counsel.

____________________________________________________________________

REASONS OF THE COURT

(Given by Kós J)

[1] Vector Ltd sold access rights to a tunnel and overhead corridor through which electricity is to be distributed to the national grid operator, Transpower New Zealand Ltd. Transpower paid Vector $53 million. Is this amount assessable for income tax or is it a non-taxable capital receipt? This turns on the interpretation of s CC 1 of the Income Tax Act 2007.

Background

[2] Vector owns two key assets in the Auckland electricity distribution system: an underground tunnel (Tunnel) and the North Shore Transmission Corridor (NSTC).
[3] Vector entered into an agreement with Transpower in June 2010 whereby Transpower could use the Tunnel and NSTC. Specifically, Vector was to:
[4] The agreement runs until June 2101. As consideration, Transpower paid approximately $3 million for the NSTC access (Northern Consideration) and $50 million for the Tunnel access (Southern Consideration). The combined sum of $53 million we refer to as the Consideration.
[5] Vector says the Consideration is a non-taxable capital receipt. The Commissioner says it is deemed to be income by s CC 1.

Statutory framework

[6] Section CC 1 reads:

CC 1 Land

Income

(1) An amount described in subsection (2) is income of the owner of land if they derive the amount from—

(a) a lease, licence, or easement affecting the land; or

(b) the grant of a right to take the profits of the land.

Amounts

(2) The amounts are—

(a) rent:

(b) a fine:

(c) a premium:

(d) a payment for the goodwill of a business:

(e) a payment for the benefit of a statutory licence:

(f) a payment for the benefit of a statutory privilege:

(g) other revenues.

...

[7] The following definitions from s YA 1 are relevant also:

YA 1 Definitions

In this Act, unless the context requires otherwise,—

estate in relation to land, interest in relation to land, estate or interest in land, estate in land, interest in land, and similar terms—

(a) mean an estate or interest in the land, whether legal or equitable, and whether vested or contingent, in possession, reversion, or remainder; and

(b) include a right, whether direct or through a trustee or otherwise, to—

(i) the possession of the land (for example: a licence to occupy, as that term is defined in section 121A(1) of the Land Transfer Act 1952):

(ii) the receipt of the rents or profits from the land:

(iii) the proceeds of the disposal of the land; and

(c) do not include a mortgage

interest,—

...

(d) in relation to land, interest in land, estate or interest in land, and similar terms are defined under the definition of estate

land—

(a) includes any estate or interest in land:

(b) includes an option to acquire land or an estate or interest in land:

(c) does not include a mortgage:

...

lease—

(a) means a disposition that creates a leasehold estate:

...

leasehold estate includes any estate, however created, other than a freehold estate

own,—

(a) for land, means to have an estate or interest in the land, alone or jointly or in common with any other person:

...

possession includes a use that is in fact or effect substantially exclusive

High Court decision

[8] Faire J summarised the two key issues thus:

Is the Consideration “other revenues”?

[9] The Judge began by noting the words “other revenues” on their face do not cover capital amounts because the plain meaning of “revenue” is “income” and where Parliament intends to tax a capital sum it must use clear language.[2] This was consistent with the purpose of the Act, which is not to introduce an all-purpose capital gains tax.[3] The Judge accepted Vector’s submission that treating “other revenues” as meaning any amount derived from a lease, licence or easement would make s CC 1(2) redundant.[4]
[10] The Judge rejected the Commissioner’s submission that the recent enactment of ss CC 1B and CC 1C shows “other revenues” had a broad coverage prior to the introduction of those sections.[5] Those new provisions say consideration for agreements to grant, renew, extend, transfer a lease or licence or to surrender or terminate a lease or licence are income of the payee. The Commissioner conceded that the enactment of those provisions could show the opposite — namely the Act did not previously make such amounts assessable and the amendment was made to fill what was perceived to be a gap.[6]
[11] The Judge concluded “other revenues” is not intended to tax amounts of a capital nature, but rather captures amounts that are of an income nature and not covered by s CC 1(2)(a)–(f).[7]
[12] The Judge therefore went on to consider whether the Consideration is capital or income. He said it was capital because Vector had given up part of its income producing assets and the payments were of a once-and-for-all nature producing an enduring advantage to Transpower. Relevantly, the life of the Tunnel is less than the period of the agreement and the NSTC easements continue beyond the termination date.[8]
[13] This meant s CC 1 did not apply to the Consideration. For completeness, however, the Judge went on to consider whether the Consideration was “derived from a lease, licence or easement affecting the land”.

Is the Consideration “derived from” a licence or easements?

[14] Vector submitted in the High Court the Consideration was “derived from” the act of dealing with licences and easements, rather than from the licences/easements themselves. Section CC 1 did not apply for that reason.
[15] The Judge rejected this. The word “from” did not have the wide meaning of “relating to” or “in relation to”.[9] The Judge relied on Court of Appeal decision in Romanos Motels Ltd v Commissioner of Inland Revenue.[10] There the taxpayer granted a lease of motel land and buildings to the lessee. In addition to rent, the lessee also paid to the taxpayer £5,000 as purchase price for the “goodwill and lease of the motels”. The Court said the £5,000 was “derived by the owner of land from” a lease, licence or easement affecting the land.[11] The goodwill of the motels was “inseparably attached to the premises”. The Court observed that for the payment for goodwill to be derived from the lease there would need to be a “real nexus” between the grant of the lease and the payment; it would not be enough that the payment for goodwill merely arose by virtue of some provision in the lease.[12]
[16] Applying those tests of “real nexus” and “inseparable attachment”, Faire J said the rights acquired by Transpower under the easements and licence were inseparable from those easements and licence. Therefore the Consideration was “derived from” the easements and licence.[13]

Apportionment

[17] Finally, the Judge noted that the question of whether there should be some apportionment of the Consideration between deemed assessable income under s CC 1 and non-taxable capital receipts did not arise. In any event, he was not satisfied Vector had shown an appropriate basis for making an apportionment.[14]

Issues on appeal

[18] The issues on appeal are these:
[19] It will be more convenient to consider Issues 1 and 2 together. The first is more focused on the policy underpinning the legislation, but not wholly so. The second is more focused on the words of the provision.
[20] There is also a cross-appeal. The cross-appeal issues are live only if the Commissioner’s appeal is allowed. The agreed cross-appeal issues are:

Issue 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” (it not being in dispute that Vector is the “owner” of “land” for the purposes of s CC1)

Issue 2: Whether the High Court erred in its interpretation of the term “other revenues” as used in s CC 1(2)(g), namely that the term does not include amounts of a capital nature

[21] By way of background, the Commissioner submits s CC 1 codifies the law and defines the capital/revenue boundary decisively for purposes of land use. It should be read as a whole, rather than as composite subsections. The Judge erred in deciding the case by reference to general principles of taxation law.
[22] The Commissioner’s core submission is the text and context of s CC 1 indicate it captures amounts derived from the use of land that Vector continues to own after the agreement. It was intended to prevent taxpayers from transforming lease payments (which are generally taxable payments on revenue account) into nontaxable receipts on capital account.
[23] The Commissioner draws a distinction between (1) this case where Vector continues to own the land from which it derives income after the transaction and (2) a case where the owner of the land disposes of the land. The latter category is caught by separate provisions in the Act (ss CB 6 to CB 23B); s CC 1 is therefore to deal with cases where a person derives income from specified uses of land short of disposal. Because Vector is still owner of the land and has derived income from the licences and easements, the Consideration is “other revenues”. The High Court is said to have erred in failing to identify that Vector continued to own the relevant land so the Consideration was derived from the land.
[24] On Faire J’s analysis, amounts “derived from” granting a lease are assessable, but amounts “derived from” easements/licences are not. The Commissioner submits there is no obvious policy reason why this should be so. That is especially so when the only way payments for rights under easements/licences can be derived is by grant of a licence or easement.
[25] In terms of the words “other revenues”, the Commissioner submits Faire J’s approach deprives s CC 1(2)(g) of any meaning. Prior to s CC 1, the amounts described in subs (2) had different tax consequences. Rents and fines (paras (a)–(b)) were assessable; only some premia were (para (c)); and payments for the goodwill of a business and for the benefit of statutory licence or privilege (paras (d)–(f)) were not assessable. Overall, therefore, s CC 1 includes amounts that were not previously assessable, so it is not remarkable that subs (2)(g) (“other revenues”) may cover capital amounts not previously assessable.
[26] Applying the ejusdem generis rule, “other revenues” must mean amounts like those in the paragraphs preceding it. The common feature of the items listed in those paragraphs is they are payments derived from the use of land rather than payments that are revenue in nature. The inclusion of prima facie capital receipts such as goodwill and premia supports that interpretation.

Discussion

[27] We do not accept the Commissioner’s submissions on Issues 1 and 2.
[28] The Commissioner’s suggested approach to the interpretation of s CC 1 assumes a coherent, overarching scheme for the taxation of receipts from land use. And that the scheme underlying s CC 1 is the taxation of amounts derived by a landowner for letting another use its land.
[29] The legislative history, however, shows no such coherent, overarching scheme for the taxation of payments related to licences or leases of land. We agree with Mr McKay’s submission for Vector that across almost a century of successive legislative reform there has never been such a scheme. Amendments in 2013 and 2014 do introduce a greater degree of coherence, but postdate payment of the Consideration in this case.[15]
[30] Section CC 1’s origins are found in s 85(e) of the Land and Income Tax Act 1916. It read:

Without in any way limiting the meaning of the term, the assessable income of any person shall for the purposes of this Act be deemed to include, save so far as express provision is made in this Act to the contrary,—

...

(e) All rents, royalties, fines, premiums, or other revenues (including payments for or in respect of the goodwill of any business, or the benefit of any statutory license or privilege) derived by the owner of the land from any lease, license, or easement affecting the land, or from the grant of any right of taking the profits thereof.

That provision remained in force until 2004, subject to only two significant amendments:

(a) The word “royalties” was removed from the first line of para (e);[16] and
(b) The concluding words “any right of taking the profits thereof” were replaced in 1984 by “any right of taking the profits of the land”.[17]
[31] It should also be noted that the word “lease” was defined for the purposes of the legislation in broadly consistent form. Originally it read: “any disposition whatever by which a leasehold estate is created”.[18] Thereafter “lease” has meant, inter alia, a disposition that creates a leasehold estate.[19] As Mr McKay submitted to us, the combined effect of these provisions is that, from 1916 at least, lease premia (amounts received by the lessor for an agreement to grant a lease) have been treated as income.
[32] The inconsistency of taxation treatment of receipts from land use was highlighted in the 1967 Ross Report.
[33] For instance, that an amount for goodwill paid on the grant of a lease was assessable, but an amount for goodwill paid on the transfer of a lease was not. The report said there was no substantial difference between these situations. It recommended that goodwill payments received for the transfer of a lease should be assessable income for the recipient and deductible for the payer when incurred in deriving assessable income.[20]
[34] That recommendation was not however fully acted upon. Amending legislation in 1968 (and thereafter) addressed one aspect of the recommendation. It allowed a deduction for premia including goodwill payments paid on the grant, renewal or transfer of a lease or licence.[21] It did not, however, provide that amounts received for the transfer of a lease were assessable. Asymmetry between the regimes providing for the assessment of income and allowance of deductions was thereby created.
[35] A further example of inconsistency concerns lease inducement and surrender payments. Prior to the legislative reform of 2013/2014, lease surrender payments were often assessable to the recipient but non-deductible to the payer. In the case of lease inducement payments, the reverse was the case.
[36] We consider this is a proper case to take into account legislative developments post-dating the June 2010 agreement. Caution is needed in drawing inferences from policy material and legislative amendments post-dating the relevant period. The general rule was stated by this Court in Postal Workers Union of Aotearoa v New Zealand Post Ltd:[22]

... it is well settled that statutory amendments subsequent to the period at issue may not be taken into account in interpreting the relevant statutory provision unless they are retrospective or declared by Parliament to be enacted to resolve an ambiguity.

However, as we noted in the Terranova Homes case, there is an exception to this rule:[23]

... based on legislative harmony and the desirability of keeping the statute book as a whole as rational and consistent as possible. Thus the courts have held that where there are two competing interpretations of an Act, and one interpretation means a later Act was unnecessary, the other interpretation should be preferred. Parliamentary time is sufficiently precious for Parliament not to pass unnecessary Acts.

[37] This, we consider, is such a case. It is relevant to consider the later amendments in assessing the Commissioner’s contention that a broad principle of taxation of amounts derived from the use of land existed at the time the Consideration was paid in 2010.
[38] A new s CC 1B was introduced with effect from 1 April 2013. It is not in doubt that it would have captured the Consideration here, had it been in force in 2010. It renders assessable amounts paid as consideration for the grant, renewal, extension, or transfer of a lease or licence. Those amounts are within the Commissioner’s supposed class of amounts derived from specified uses of land short of disposal, yet evidently are not within the scope of s CC 1. They needed to be taxed separately.
[39] We note also Mr McKay’s submission that despite s CC 1B, the scheme of the legislation does not achieve the overarching purpose contended by the Commissioner. The new rules apply to leases and licences. Payments for the grant, surrender or transfer of an easement are still generally governed by ordinary capital/revenue principles. The same is the case for payments for modification of lease and licences, despite the fact that they are often economically analogous to lease or licence surrender payments which are covered by the new conditions.
[40] A joint Revenue and Treasury paper released in April 2013 commenting on the introduction of s CC 1B identified these potentially inconsistent outcomes in the treatment of lease transfer and lease surrender payments.[24] The paper recommended a generic approach whereby any payment relating to a lease or licence with a term of less than 50 years should be deductible to a payer and assessable to a recipient.[25] It mooted a new s CC1 that would render amounts assessable if the payee derives an amount in relation to a right that is an estate or a licence to use land, is the current, past or intended land right owner, and the amount is in the nature of rent or the relevant land right has a period of less than 50 years.
[41] Such a generic reform has not however been implemented. Rather, the Executive has made a conscious decision following consultation to introduce targeted reforms on specific revenue risks. It has not attempted a broad schematic reset.[26]
[42] If Parliament had intended a scheme of the nature the Commissioner now contends for — that is, capturing all amounts derived from specified uses of land short of disposal — we consider it would have said so. And it would have taken an approach similar to that suggested by the Revenue and Treasury in April 2013. The fact that, even after the period relevant to this appeal, the Executive and Parliament have chosen to target specific amounts for taxation suggests to us that s CC 1 has never had the general ambit contended for by the Commissioner in her argument before us.
[43] An approach that rests on s CC 1 being targeted coherently at payments for the use of land is therefore problematic. As the Supreme Court has noted, in Stiassny v Commissioner of Inland Revenue, the best indication of the purpose of a taxing provision remains the detailed wording read in context and in its most natural sense.[27] As the Court also said there:[28]

In construing and applying a taxing provision, a court leans neither for nor against the taxpayer, but should require that before the provision is effectual to make the taxpayer amenable to the tax, it uses words which, on a fair construction, must be taken to impose that tax in the circumstances of the case.

Analogical reasoning remains “an insubstantial foundation from which to draw inferences” as to the tax treatment of payments.[29]

[44] We turn now, therefore, to focus on s CC 1 and Issue 2 in particular.
[45] The lack of a coherent scheme or approach is evident from the listed amounts in s CC 1(2). The listed amounts do not naturally fall into a group with common characteristics. For instance:
[46] We make four points.
[47] First, 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. It stopped short of that, instead taking a selective approach. Any attempt to imbue the term “revenues” with a consistent flavour from the items preceding is highly problematic. The items are diverse in nature. No ejusdem generis class emerges.
[48] Secondly, against that background, we consider it is significant that Parliament chose, deliberately, the concluding words “other revenues”. Not, for instance, “other like amounts”. Those words contain their own well-recognised constraints.
[49] Thirdly, the best approach is to focus on the words “other revenues” read in their most natural sense. In a taxation context, they recall the traditional capital/revenue distinction. And that makes perfect sense if s CC 1 is seen as codifying the tax treatment of specific amounts derived from leases, licences and easements affecting the land. It is to capture amounts that would be income on ordinary concepts, plus some specific amounts that might otherwise be treated as non-assessable capital receipts. As we have already seen, further such amounts were added later, in a separate provision. But in context, the words “other revenues” in subs (2)(g) are there to capture revenue receipts, such as periodic outgoing payments paid to a landlord which are not themselves “rent” within subs (2)(a).
[50] Fourthly, in our view the Commissioner’s approach would effectively render subs (2) otiose. If “other revenues” can include amounts that are on capital account then any “amount” derived as per subs (1) would be an “amount described in subsection (2)”. That cannot have been intended. Subsection (2) must have some work to do. Parliament intended discrimination, and the Commissioner must live with that. The problem she identified was resolved, at least as far as this Consideration is concerned, in 2013. But it was not back in 2010, when this Consideration was paid.

Conclusion

[51] The text of s CC 1 and its context in the scheme of the Act do not establish that the purpose of the section is to include in a taxpayer’s income all amounts derived from the use of land that it owns. 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: 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 (namely the agreement dated 14 June 2010) by concluding that the Consideration was received for Vector “effectively permanently giv[ing] up part of its income producing asset” and its ability to use its asset being “permanently impaired”, rather than concluding that the Consideration was received for the use of Vector’s “land” by Transpower

[52] The Commissioner makes an alternative submission that in reality the Consideration is disguised rent paid in advance as a lump sum. The way the parties describe the Consideration in the agreement is not decisive. Vector owns the underlying interests in the land and derives the Consideration from agreeing to let Transpower use and occupy space in the Tunnel and NSTC. That in substance is a lease arrangement involving payment of rent. In this respect, the Commissioner takes particular issue with Faire J’s finding that Vector has “effectively permanently given up part of its income producing asset in exchange for a lump sum payment”.[31]

Discussion

[53] We reject the Commissioner’s submission on Issue 3.
[54] First, in terms of the NSTC, Vector granted Transpower permanent interests. It has transferred a two-thirds share in the NSTC easements. Vector has also granted easements to Transpower over its freehold land in the NSTC and transferred Designation 179A. These are permanent impairments of its ability to use those assets. They continue beyond the termination of the agreement in 2101, according to cl 16.2.
[55] Secondly, in terms of the Tunnel, Vector has granted a licence to use the Tunnel and easements to access its entry and exit points. These are economically permanent: they last until 2101, beyond the expected life of the Tunnel.
[56] Thirdly, there is no ability for Vector to regain its interests for non-payment of the Consideration, because that Consideration has already been paid. There is also no ability for Vector to regain its interests in the easements and other property interests following a default by Transpower. Rather, the agreement in cl 15.1 specifies a right to sue for damages arising from a breach. That again indicates that property interests in the NSTC and Tunnel have been permanently handed over to Transpower.
[57] This means there is effectively a permanent disposition of property interests. As a matter of law, it is not necessary for Vector to have legally disposed of its rights to the parts of the NSTC and the Tunnel for the Consideration to be classified as on capital account.[32] The substance of the transaction is what matters.

Conclusion

[58] 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.

Cross-appeal

[59] As the appeal will be dismissed, it is unnecessary for us to consider the crossappeal. Formally, it is dismissed.

Result

[60] The appeal and cross-appeal are dismissed.
[61] The appellant must pay the respondent’s costs for a standard appeal on a band A basis together with usual disbursements. We certify for second counsel.
[62] We however decline Vector’s request for costs for a complex appeal. This appeal concerned a discrete issue of statutory interpretation and does not meet the test in r 53B of the Court of Appeal (Civil) Rules 2005.








Solicitors:
Crown Law Office, Wellington for Appellant
Russell McVeagh, Auckland for Respondent

[1] Vector Ltd v Commissioner of Inland Revenue [2014] NZHC 2069, (2014) 26 NZTC 21-096 at [30].

[2] At [48]–[49].

[3] At [54].

[4] At [55].

[5] These were introduced by the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013.

[6] Vector Ltd v Commissioner of Inland Revenue, above n 1, at [56]–[57].

[7] Vector Ltd v Commissioner of Inland Revenue, above n 1, at [58].

[8] At [69]–[70].

[9] At [78].

[10] Romanos Motels Ltd v Commissioner of Inland Revenue [1973] 1 NZLR 435 (CA).

[11] “... derived by the owner of the land from ...” was the statutory language of s 88(1)(d) of the Land and Income Tax Act 1954, which is a predecessor to s CC 1.

[12] Romanos Motels Ltd v Commissioner of Inland Revenue, above n 10, at 438–439.

[13] Vector Ltd v Commissioner of Inland Revenue, above n 1, at [84].

[14] At [85].

[15] Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Act 2013; Taxation (Annual Rates, Employee Allowances and Remedial Matters) Act 2014.

[16] Land and Income Tax Amendment Act (No 2) 1953, s 11.

[17] Income Tax Act 1994, s CE1(1)(e).

[18] Land and Income Tax Act 1916, s 2, definition of “lease”.

[19] Income Tax Act 2004, SOB 1; Income Tax Act 2007, s YA 1.

[20] Lewis Ross and others Taxation in New Zealand: Report of the Taxation Review Committee (Government Printer, Wellington, 1967) at [503]–[505].

[21] Land and Income Tax Amendment Act 1968, s 20, which inserted s 121A into the Land and Income Tax Act 1954. See later the Income Tax Act 1976, s 137; Income Tax Act 1994, s EZ 6; Income Tax Act 2004, ss DZ 9 and EZ 6. Contrary to Vector’s submissions, these provisions do not seem to capture payments on transfer of a lease or licence.

[22] Postal Workers Union of Aotearoa v New Zealand Post Ltd [2012] NZCA 481, [2013] 1 NZLR 66 at [22].

[23] Terranova Homes & Care Ltd v Service and Food Workers Union Nga Ringa Tota Inc [2014] NZCA 516, [2015] 2 NZLR 437 at [195] (footnotes omitted).

[24] Inland Revenue and the Treasury The Taxation of Land-related Lease Payments: An officials’ issues paper (April 2013) at [1.5]–[1.7].

[25] At [1.14].

[26] Policy and Strategy, Inland Revenue Department Commentary to Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill 2013 (November 2013) at 81.

[27] Stiassny v Commissioner of Inland Revenue [2012] NZSC 106, [2013] 1 NZLR 453 at [23].

[28] At [23].

[29] Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988] 2 NZLR 736 (CA) at 739–740.

[30] “Land use” is the heading preceding ss CC 1 to CC 2.

[31] Vector Ltd v Commissioner of Inland Revenue, above n 1, at [69].

[32] Inland Revenue Commissioners v John Lewis Properties plc [2002] EWCA Civ 1869, [2003] Ch 513 at [84].

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