Vector Limited v Commissioner of Inland Revenue [2014] NZHC 2069 (29 August 2014)

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Hearing:	18, 19, 20 August 2014
Counsel:	L McKay, SE Fitzgerald, F Ward for plaintiff PH Courtney, JR Burns, RN Park for defendant
Judgment:	29 August 2014
Reissued:	18 November 2014

This judgment was delivered by me on 29 August 2014 at 3pm pursuant to Rule 11.5 of the High Court Rules.

Vector Limited v The Commissioner of Inland Revenue [2014] NZHC 2069 [29 August 2014]

[1] The question that arises in this case is whether certain payments made by Transpower New Zealand Ltd to Vector Ltd in 2011 and 2012 are subject to income tax under s CC 1 of the Income Tax Act 2007.

[2] There are three issues that arise. The first two are whether the payments received by Vector Ltd are:

[3] The third issue is raised by the plaintiff as an alternative in the event that it fails on both of the first two issues. The issue is whether the payments made relating to the North Shore Transmission Corridor (“NSTC”), and referred to as the Northern consideration amount, should be apportioned.

[4] The parties accept that the plaintiff is the owner of land for the purposes of s CC 1.

[5] It is common ground that the amounts in question are not business income or income in the ordinary sense and that ss CA 1(2) and/or CB 1 of the Income Tax Act

2007 do not apply. The sole question is whether the amounts ought to be treated as

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

(e) a payment for the benefit of a statutory licence: (f) a payment for the benefit of a statutory privilege: (g) other revenues.

[7] Section YA 1 of the Income Tax Act 2007 provides a number of definitions. The following are relevant to this case:

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

(ii) the receipt of the rents or profits from the land: (iii) the proceeds of the disposal of the land; and

The balance of the definition is not relevant to this case and is therefore omitted.

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

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

In real property law, is an authority to do an act that would otherwise be a trespass.

[9] “Easement” is not defined in the Act. The ordinary meaning of easement is:²

A right enjoyed by a person over his or her neighbour’s property, such as a right of way ...

[10] An easement gives a person a right to use another’s land in a particular way, or to prevent the other person from using their land in a particular way. Easements may be granted “in gross”, that is, where the land over which the easement is enjoyed (the servient tenement) is not appurtenant to another parcel of land (the

¹_{Butterworths New Zealand Law Dictionary (7th ed,
LexisNexis, Wellington, 2011).}

... when a legal easement has been created ... the right granted is a jus in rem, or right availing against all the world, which permanently binds the land over which it is exercisable and permanently subsists for the advantage of the land for the benefit of which, or the person for whose benefit, it was created.

Because an easement is, by definition, essentially a right owned by one person over the land of another, that is, the servient tenement, there cannot be an easement unless there is a servient tenement, and the servient tenement must be defined as to area with sufficient certainty ...

[12] In Auckland City Council v Man O’ War Station, the Court held that an easement is not an estate, but is an interest in land.⁴

[13] The plaintiff is an electricity distribution company. It is commonly referred to as a “lines company”. It owns two electricity distribution networks in the greater Auckland region. It owns a range of assets, including land, plant and equipment. These are made available to retailers to deliver electricity to customers. It derives its income from lines charges.

[15] The Tunnel runs from Penrose to Vector’s Hobson Street substation. The Tunnel is about 3 metres in diameter. It is approximately 60 metres below ground level. In 2000/2001 Vector installed a number of cable circuits in the Tunnel. They form a major part of Vector’s transmission electricity network supplying the Auckland Central Business District. The plaintiff’s title is made up of a series of leases of the subsoil together with electricity rights in gross over certain titles.

[16] The NSTC is a series of land rights which Vector owns. It consists of legal and equitable instruments which are joined together to make the Corridor and

⁴Auckland City Council v Man o’ War Station Ltd [1996] 3 NZLR 460 (HC) at 465.

includes rights acquired as a result of the plaintiff entering into an agreement with North Shore City Council in 2006 under which it was granted further easements. These are referred to as the NSCC easements. It exists between a substation at Albany owned by Transpower New Zealand Ltd and the interchange at Constellation Drive and Upper Harbour Highway with the Northern Motorway. It has an overhead, 110 kV double circuit line that runs above the NSTC.

[17] The Tunnel and the NSTC form part of Vector’s electricity distribution network. Vector derives its taxable income from the network structure. Both the Tunnel and the NSTC have capacity constraints which arise both from a physical and a heat perspective.

[18] Both parties filed briefs of evidence from engineers. Both experts express views of the capacity of the Tunnel and the NSTC. I will refer to the relevant evidence later in this judgment.

[19] Transpower New Zealand Ltd manages and operates the national electricity transmission grid in New Zealand. The plaintiff entered into an agreement with Transpower, which bears the date 14 June 2010 but which was apparently executed on 15 June 2010. The background and reason for that agreement is set out in the introductory section.

(a) Transpower submitted an investment proposal to upgrade the North Auckland and Northland grid (NAaN Grid Upgrade Plan) by, among other things, installing a cable connection

Transpower’s Works. This agreement sets out the terms and conditions upon which Transpower will lay and install the Cables

[20] Subject to a number of exceptions the agreement provides for a termination on 30 June 2101.

_{[21] In summary the agreement provides for the plaintiff to grant
Transpower:}

	(i)	A two-thirds share in the NSCC Easements to be granted to the
		plaintiff;
	(ii) (iii)	A two-thirds share in the NSTC Easements; and Easements over the plaintiff’s freehold land in the NSTC.
[22]	Thos	e provisions are referred to in this judgment, and in the papers, as “the

The access right to the Tunnel referred to in [23](i) above was called, in the papers,

[24] The agreement provides for Transpower to pay the plaintiff $3,113,561.64 for the Northern Easements. This payment is referred to as the Northern consideration amount. It also provides that Transpower is to pay the plaintiff $50,000,000 plus GST in two instalments of $25,000,000 plus GST for the Southern Access Rights. These payments are referred to as the Southern consideration amount.

[25] This proceeding does not concern the non-monetary payment for the additional easements which were provided for by way of an additional easement swap.

[26] The consideration for the Northern Easements and the first instalment for the Southern Access Right were paid to the plaintiff on 1 June 2011. The second instalment in respect of the Southern Access Right was paid to the plaintiff on 1 June

[27] In each of its 2011 and 2012 income tax returns the plaintiff returned one- sixth of the total amount, being $8,852,260.30 per year as income under s CC 1 of the Income Tax Act 2007. The plaintiff spread the amounts according to s EI 7 of the Income Tax Act 2007 over six years. The tax on that income was $2,665,678 for the

[28] There is no case law on s CC 1 that directly deals with the first two issues that are raised in [2] of this judgment.

[29] The plaintiff issued a notice of proposed adjustment. It proposed to adjust its assessable income on the basis that the payments were non-taxable capital receipts. After attending a conference, the parties agreed that the dispute should be truncated and the matter referred to the court for determination. The broad question to be determined is whether the payment made in respect of the Southern Access Right and for the Northern Easements constitutes income under s CC 1 of the Income Tax Act 2007.

[30] The Court is required to determine the meaning of the words “other revenues” as they appear in s CC 1(2)(g) and “derived .. from” as they appear in s CC 1(1) of the Income Tax Act 2007. This is necessary to determine whether the

[31]	The (1)	starting point is s 5 of the Interpretation Act 1999 which provides: The meaning of an enactment must be ascertained from its text and
		in the light of its purpose.
	(2)	The matters that may be considered in ascertaining the meaning of an enactment include the indications provided in the enactment.
	(3)	Examples of those indications are preambles, the analysis, a table of contents, headings to Parts and sections, marginal notes, diagrams, graphics, examples and explanatory material, and the organisation and format of the enactment.

[32] Section 5(1) has been described as “the ‘Cardinal Rule’, as it has rightly be dubbed, is not at the option of the Judges. The direction, now given in s 5(1) of the Interpretation Act, is mandatory”.⁵

[33] Ms Courtney summarised correctly the principles of interpreting legislation as extracted from the Supreme Court decision in Commerce Commission v Fonterra Co-operative Group Ltd as follows:⁶

(i) the statutory text must be considered in isolation of purpose to determine its plain and ordinary meaning or meanings;

(ii) the meaning, or possible meanings, of the text must then be cross- checked against the purpose of the legislation; and

(iii) in determining purpose, regard must be had to both the immediate and general nature of the context; it may also be relevant to consider the

⁶Commerce Commission v Fonterra Co-operative Group Limited [2007] NZSC 36, [2007]

[34] The position in relation to revenue statutes was the subject of comment by the

[23] In this country, the general approach to the interpretation of a revenue statute is much the same as for other statutes. The purpose of a taxing provision may be a guide to its meaning and intended application. But, as Burrows and Carter point out, in most cases the only evidence of that purpose is the detailed wording of the provision and the safest method is to read the words in their most natural sense. 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. [citations omitted]

[35] Reference to the legislative history may be helpful as an aid to its construction.⁸The Court may have regard to surrounding law and other material as a guide to interpretation. The Court may admit and use parliamentary history

	(i)	reports of Committees or Commissions recommending the legislation, for example the report of a Law Committee or the Law Commission;
	(ii)	the explanatory note accompanying the introduction copy of the Bill ...;
	(vii)	the debates in Parliament during its passage.
[36]	The i	mportance of considering the plain words of a statutory provision is well

illustrated by the decision in Commissioner of Inland Revenue v McKenzie (NZ) Ltd.¹⁰The High Court had concluded that because there was an expressed rule that provided that premiums paid on the grant of a lease were assessable income to the recipient and deductible to the payer, it must follow that Parliament intended that

_{similar amounts paid in the event of a surrender of the lease should
also respectfully}

⁷_{Stiassny v Commissioner of Inland Revenue [2012]
NZSC 106, [2013] 1 NZLR 453.}

⁹JF Burrows and RI Carter Statute Law in New Zealand, (4^thed 2009 LexisNexis, Wellington,

¹⁰Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988] 2 NZLR 736 (CA).

be assessable income and deductible. The Court of Appeal did not accept that view. The Court held that the relevant statutory provisions on their plain words did not provide for the assessability or deductibility of lease surrender payments. The Court of Appeal said:¹¹

With respect to the Judge, we consider that the provisions of the Income Tax Act referring to the income tax treatment of receipts and payments in relation to other kinds of lease transactions are an insubstantial foundation from which to draw inferences as to the assessability or deductibility of payments in respect of the surrender of leases, one way or the other. ... But premiums paid or received on the surrender of a lease are not dealt with at all under those statutory provisions. ... In the circumstances it would be unsafe to draw any inference of a legislative purpose other than that their character as capital or income fall for determination on general taxation principles.

[37] Ms Courtney traced the history of this legislation back to the Land and Income Tax Assessment Act 1891. She referred to changes introduced by s 11 of the Finance Act 1915 and in particular to s 11(g) of that Act. That made assessable income

from rents, royalties, fines, premiums and other revenues (including payments for or in respect of the goodwill of any business, or the benefit of any statute, licence or privilege) derived by the owner of land or any estate or interest in land therein from any lease, licence or easement affecting the same or for the grant of any right of taking the profits thereof.

She submitted that it would appear that s 11(g) was introduced to widen the receipts derived in relation to land that were to be included in a land owner’s income where the land owner had allowed someone else to use the land.

1916. This section is probably the true predecessor to the current provision. Section

85 was the section in the Act which defined the meaning of assessable income. It provided as follows:

(b) All salaries, wages, or allowances (whether in cash or otherwise), including all sums received or receivable by way of bonus, gratuity, extra salary, or emolument of any kind, in respect of or in relation to the employment or service of the taxpayer;

(c) All profits or gains derived from the sale or disposition of land or any interest therein, if the business of the taxpayer comprises dealing in such property, or if the property was acquired for the purpose of selling or otherwise disposing of it at a profit;

(d) All profits or gains derived from the use or occupation of land, or the extraction, removal, or sale of minerals, timber, or flax, whether by the owner of land or by any other person;

(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 land from any lease, license, or easement affecting the land, or from the grant of any right of taking the profits thereof;

[39] Section 85(e) is materially similar to the current s CC 1. Counsel agreed that subsection (e) was retained in broadly the same form in subsequent income tax enactments up to 2004 when it was replaced with s CC 1 of the Income Tax Act 2004 which defined income in terms identical to s CC 1 of the Income Tax Act 2007.

Taxation in New Zealand (the “Ross Report”) and noted that at Chapter 33 consideration was given to the predecessor to s CC 1. The report noted that premiums received on the grant of a lease were assessable under that section, but premiums received on the transfer of a lease were not.¹²The report considered that while the form of transactions differed there is little if any difference in substance. It recommended the premiums received from the transfer should also be assessable to the recipient. It also recommended that such amounts should be deductible to the

¹²Report of the Taxation Review Committee [1967] Taxation in New Zealand (October 1967) at

recommendations were implemented only in part. The recommendation that amounts paid for the transfer of a lease should be assessable has never been acted upon. However, legislation was enacted permitting a deduction by a person paying an amount for the grant or transfer of a lease and also the grant or transfer of a licence. That lead to a position, Mr McKay submitted, where there was no symmetry or cohesion between the relevant provisions. That is because the lease transfer receipts continued to be non-assessable despite the fact that they were deductible to the payer and there was little, if any, difference in substance between a lease transfer receipt and a lease premium receipt, which was assessable. He noted that inconsistency remained as at the time the amounts which were questioned in this dispute were derived.

[41] Mr McKay submitted that when officials realised this asymmetry they accepted the only way to change this was through specific legislative amendments. I do not intend to review what is proposed because it does not apply as at the date which is relevant to this dispute.

[42] The parties also referred to the December 1989 report of the Consultative Committee on the Taxation of Income from Capital (the Valabh Committee report). Ms Courtney submitted that the objective of the review was to consider the manner in which income from capital was taxed, identify defects in the tax system and consider how the system could be reformed. The Committee identified forms of income that had traditionally not been considered to be taxable, but which had been made taxable by specific provisions of the Income Tax Act 1976, including “otherwise non-taxable payments under leases taxable under section 65(2)(g)”. With regard to s 65(2)(g) of the Income Tax Act, the predecessor to s CC 1(2), the

As a general rule, New Zealand law does not include receipts for the sale of goodwill within the vendor’s assessable income because such payments would normally be considered to be receipts on capital account. However, section 65(2)(g) includes within the definition of assessable income payments for or in respect of goodwill of any business, or the benefit of any statutory license or privilege, derived by the owner of land from any lease or

¹³Consultative Committee on the Taxation of Income from Capital, Consultative Document on the

similar interest affecting the land. The effect of this provision is to bring into

Section 65(2)(g) is an attempt to avoid allowing taxpayers to transform lease payments (which would generally be taxable payments received on revenue account) into a non-taxable receipt received on capital account. For that reason, section 65(2)(g) includes in assessable income premiums as well as goodwill received by a lessor ...

These provisions demonstrate how it has been found necessary to move the traditional capital/revenue boundary to hinder the ability of taxpayers to transform otherwise assessable income into income on capital account that would not be subject to tax ...

[43] Mr McKay submitted that contrary to the Commissioner’s submission, the Valabh Committee report shows that only the capital amounts included in s CC 1 are those specifically listed in s CC 1(2). Mr McKay submits that s CC 1 applies to amounts that would be income under ordinary concepts, with some specifically enumerated exceptions, such as the inclusion of goodwill.

Are the payments made under the agreement other revenues for the purposes of s CC1(2)(g) of the Income Tax Act 2007?

[44] I provide a brief summary of each side’s argument. Further discussion of the arguments will occur in the discussion section.

[45] The Commissioner’s position is that s CC 1 is a specific legislative provision which taxes both income and capital in clear words. In the Commissioner’s submission, it does not matter whether the amounts at issue here are capital or income, as the phrase “other revenues” in s CC 1(2)(g) captures both. The Commissioner submits that this is clear from the statutory context, as some of the matters listed in s CC 1(2) have traditionally been held to be of a “capital” nature yet the section makes them income. In the context of s CC 1(2), the ordinary meaning of revenue as being income, is displaced. She argues that the purpose of s CC 1 is to provide for the taxation of any income a person derives from any dealing with land, not constituting a disposal. The items in s CC 1(2) are payments relating to the use of land, rather than payments that are revenue by their nature.

[46] Vector’s position aligns with the Commissioner’s to an extent – the amount is capital, absent a special provision which treats those capital amounts as income. Vector differs from the Commissioner as it argues that “other revenues” does not capture capital amounts and therefore s CC 1 does not apply in this case. Vector submits “revenues” must be interpreted by giving effect to the plain meaning of the word itself. The fact that s CC 1(2) includes some amounts which have been traditionally regarded as capital does not change the meaning of that term. Contrary to the Commissioner, Vector submits that the ejusdem generis interpretation rule does not apply. The role of “other revenues”, in Vector’s submission, is to capture amounts of a revenue nature that might be derived from a lease, licence or easement without being specifically covered by the preceding words in s CC 1(2).

[47] The question in this case is what does “other revenues” mean in s CC 1, and

[48] The plain meaning of “revenue” is “income”.¹⁴This is accepted between the parties.¹⁵The fact that the word used in the subsection is the plural “revenues” does not change the position.¹⁶Where the parties differ is over whether, in the context of this section, “other revenues” is intended to cover capital amounts. I accept that Parliament can tax capital amounts, so that if I were to find that the amounts at issue here are capital in nature, that does not of itself prevent s CC 1 applying. However,

_{where Parliament intends to tax an amount of capital, it must use clear
language to}

50 TLR 130 (HL); Miller v Inland Revenue Commissioner (1966) 10 AITR 122 (SC); AA Finance Ltd v Commissioner of Inland Revenue (1994) 16 NZTC 11,383 (CA) at 11,391.

I think that counsel for the objectors are correct in submitting that wherever Parliament has intended to convert a form of capital gain into assessable income, clear and unmistakable language has been used for that purpose, e.g., s. 88 (1) (d) relating (inter alia) to premiums derived by the owner of land from a lease or payments for goodwill of a business. As Viscount Sumner observed in Levene v Commissioners of Inland Revenue [1938] A.C.

217; [1928] UKHL 1; [1928] All ER Rep. 746: ". . . the subject ought to be told in statutory and plain terms when he is chargeable and when he is not" (ibid., 227; 751).

[49] I reject the argument that the words “other revenues” do clearly and unmistakably tax capital, on their face. That argument is unsustainable given the accepted plain and ordinary meaning of “revenue”.

[50] The list in s CC 1(2) does include items that have traditionally been regarded as capital. However, I do not consider that the Commissioner’s argument that this means that “other revenues” clearly includes items of a capital nature, can succeed. To have to rely on other items in the list to divine the meaning of “other revenues” shows that the term itself is not clear enough to tax an amount of capital. This is illustrated by the inclusion of the word “premium” in the list. This has traditionally been considered to be a capital item, so its inclusion in what an “amount” is, when s CC 1(1) says “an amount described in subsection (2) is income” is a clear signal

that Parliament intends that capital item is to be taxed.¹⁸“Other revenues” cannot

tax capital, using a term that has always been regarded as meaning income. Therefore “other revenues” can only mean other items not covered by s CC 1(2)(a) – (f), that are income in nature.

[51] It follows that in rejecting the above argument, I also reject the submission that applying the ejusdem generis rule, all of the items in s CC 1(2) relate to the “use” of land and therefore “other revenues” can tax capital items. I reject that submission for the same reason, namely that if Parliament intends to tax capital it must do so with clear language. In my view, in these circumstances the application

_{of the ejusdem generis rule is inconsistent with the general principle
that Parliament}

must use clear language to tax an amount of capital. Additionally, I consider that the matters listed in s CC 1(2) are not all of the same class.

(a) to define, and impose tax on, net income: (b) to impose obligations concerning tax:

[54] That purpose is in line with New Zealand not having a general all purpose “capital gains” tax. An amount that would otherwise be capital (and non-taxable) is not included in a person’s income by the Act unless Parliament has intended that to be so by a specific provision.

[55] Context is relevant to purpose. I accept 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. Treating the term as having that meaning would, as Vector submits, mean that the section would be saying “an amount is income of the owner of the land if they derive the amount from a lease, licence or easement”. The effect of this would be to make subsection two unnecessary. But the courts must

CC 1B Consideration for agreement to grant, renew, extend, or transfer leasehold estate or licence

(1) This section applies when a person (the payee) derives an amount as consideration for the agreement by the payee to the grant, renewal,

_{extension, or transfer of a right (the land right) that is a
leasehold estate, or a}

(b) as consideration for the transfer of the land right to the person paying the amount.

CC 1C Consideration for agreement to surrender leasehold estate or terminate licence

(i) an estate in land from which is granted a right (the land right) that is a leasehold estate not including a perpetual right of renewal, or is a licence to use land:

(b) derives an amount as consideration for the agreement by the payee to the surrender or termination of the land right.

[57] The Commissioner submitted that the enactment of these sections shows that s CC 1(2)(g) “other revenues” did cover these amounts prior to their enactment. She also conceded that their enactment could show the opposite. The latter is clearly the more compelling argument.

[58] I conclude that “other revenues” is not intended to tax amounts of a capital nature. It captures amounts that are income, but are not covered by s CC 1(2)(a) – (f). Whether s CC 1 applies in this case is therefore answered by determining whether the amounts at issue here are of a capital nature or are income.

[59] The approach to be taken in determining whether payments are capital or income was set out by Lord Pearce in BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia (BP Australia) where he stated:²⁰

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in borderline cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer:

“Depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured employed or exhausted in the process”:

[1946] HCA 34; 72 CLR 634, 648. As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other; but

those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallise particular factors which may incline the scale in a

[60] In answering what the payments were calculated to effect from a practical and business point of view, the Court of Appeal in McKenzies extracted the following five indicia from the Privy Council’s decision in BP Australia:²¹

(iii) whether the payments were of a once and for all nature producing assets or advantages which were an enduring benefit;

(iv) how the payment would be treated on ordinary principles of commercial accounting; and

1 NZRL 529 (PC) at 536 and by the Court of Appeal in Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988] 2 NZLR 736 at 740 and Commissioner of Inland Revenue v Thomas Borthwick & Sons (Australasia) Ltd (1992) 16 TRNZ 777 (CA) at 779.

(v) whether the payments were expended on the business structure of the taxpayer or whether they were part of the process by which income was earned.

[61] In uncomplicated cases, one or more factors may very clearly point to the expenditure being capital or revenue in nature and so recourse to all of these factors is unnecessary.²²However, in borderline cases, some factors will point to a finding of capital while others will point to the expenditure being capital. In such cases, the factors alone will not be determinative. Therefore it is necessary to analyse the facts as a whole and consider which factors carry the most weight in the light of the given facts.²³

[62] The Tunnel and the NSTC form part of Vector’s electricity distribution network. Vector derives its taxable income from the network structure. The payments from Transpower were therefore not part of the process by which income was earned by Vector.

[63] Transpower paid Vector approximately $53 million in consideration of Vector agreeing to grant the easement of rights and “thereby diminishing the physical capacity of the NSTC for Vector to utilise” (cl 6.1) and in consideration of Vector agreeing to make available the Southern area for cables and equipment and “thereby diminishing the physical capacity of the Tunnel for Vector to utilise” (cl 6.3). The payments were made in lump sum amounts.²⁴

[64] The Tunnel and NSTC have capacity constraints which arise both from a physical and heat perspective. Vector served a brief from Mr NM Ellis. He is an electrical engineer employed by the plaintiff since March 2008. He has held a

_{number of positions. They included initiating and leading the Vector
NAaN Project}

²²At 741; Commissioner of Inland Revenue v LD Nathan & Company Ltd [1972] NZLR 109 (CA)

Delivery Team and collaborating the project and interface with Transpower. His brief was served in support of the plaintiff’s case.

[65] The defendant filed a brief of evidence from Mr HE Orton. He is a registered professional engineer in the Province of British Columbia, Canada. He has operated a consulting engineering business as an underground cable specialist. He was provided with Mr Ellis’ brief together with maps of the Tunnel and the agreement.

[66] Both experts express views of the capacity of the Tunnel and the NSTC. I ordered a conference pursuant to r 9.44. The engineers met. With the assistance of counsel they extracted twenty-six questions from their respective briefs. The questions were about the capacity of the Tunnel and NSTC and whether after accommodating Transpower’s cables and equipment, there would be space for additional assets, infrastructure and equipment and ability to expand thermal capacity. The questions were also directed to the advantages and disadvantages of various methods which could be used to increase capacity and the possibility of solutions in the future. They produced a joint statement which provided their responses to the twenty-six questions. Counsel were in agreement that the twenty- six questions and the joint statement should be admitted as evidence and that the engineers would not then be formally called. I agreed with that approach and proceed on that basis.

[67] It is not necessary that I record each question and answer. What is significant is the overall position which they conveyed. In that way there is an appreciation of the effect on Vector of the rights that it has transferred to Transpower. The engineers agreed that there were a number of factors that must be taken into account when considering how capacity of the Tunnel and the corridor could be increased. What comes through in their answers is that a study of the needs and available options must be undertaken on a project-by-project basis. That, understandably, requires a consideration of the cost viability of options. There was some disagreement as to the comparative costs of various possibilities. The position, however, is well summed up when one looks at the twenty-sixth question and the answer that the expert engineers provided to it. The question was:

Whether the options suggested could only occur “at significant cost and in many cases, with a number of operational impacts”.

1.50 Mr Ellis noted that he has no reason to change what was stated at para 3.13 of his reply brief; namely that he agreed with the options presented by Mr Orton, but for example, there would be, in Mr Ellis’s view relative to Vector, a high cost to retrofit if that was carried out before the end of life of the current cables. Mr Orton was of the view that there is a cost but not necessarily high relative to the total project costs. Mr Ellis agreed that the capacity of the Tunnel is not finite but will always be constrained by the presence of Transpower’s cables in the Tunnel.

1.51 There was discussion of the fact that Vector had agreed to accommodate Transpower’s cables in the Tunnel and Mr Orton noted that they were a constraint which was one of the factors that would need to be considered going forward: “you have to deal with what you agreed”. Mr Orton noted that in respect of the comment that the options involved “significant” cost, some were less than others (for example water cooling as compared to HTS).

1.52 After general discussion, it was agreed that the matter would ultimately need to be considered on a project-by-project basis taking into account the constraints presently existing, ie including Transpower’s cables.

[69] I accept Vector’s submission that it has effectively permanently given up part of its income producing asset in exchange for a lump sum payment. Both the Tunnel and NSTC have capacity constraints as described above. Vector’s agreement for Transpower to use the Tunnel and NSTC necessarily means that the capacity available for Vector’s own use is restricted. The agreement terminates after 90 years, in 2101. The evidence was that the life of the Tunnel is expected to be less. The agreement contains exceptions set out in cl 16.2, which include cl 4.1 and 4.6(b). The easements in respect of the NSTC are to continue beyond the termination date. There is also a special provision in cl 16.13 of the agreement dealing with the situation that could arise if Vector’s rights for some reason were to terminate. These provisions serve to emphasise the extent of the transfer of rights which are governed by the agreement. The Commissioner is correct that Vector has not legally disposed of its rights to those parts of the Tunnel and NSTC that are subject to the agreement.

However, this is not necessary.²⁵Through the agreement, Vector’s ability to use its asset is effectively permanently impaired. The payments were of a once and for all nature producing advantages to Transpower which were enduring. This factor clearly points toward the expenditure being capital in nature.

[70] The amounts are capital. Section CC 1 does not apply in this case. This finding is enough to dispose of the case. However, I will go on to briefly express my view on the issue of whether the payments were “derived ... from” a lease, licence or easement affecting Vector’s land.

Is the payment derived “from a lease, licence or easement affecting the land”

[71] It is common ground that Vector continues to be the “owner of land” for the

[72] The agreement contains a no-merger clause at clause 22.8. In short, the provisions of the agreement do not merge, and are not extinguished, by the grant of the Southern Access Right or the grant or transfer of an interest in an easement in respect of either the Southern Access Right or the NSTC.

[73] The plaintiff submits that s CC 1 requires the courts to have regard to the source or origin of the payment. The plaintiff ’s position is that there is a distinction between amounts derived from an item of property, eg rent from a lease, or a licence fee for a licence on the one hand, and amounts derived from the act of dealing with that property, eg a grant, a surrender, a transfer. Except for a lease, the plaintiff ’s submission is that s CC1 is not concerned with amounts derived from that grant of a licence or easement. A lease is in a different position because the definition of lease in s YA1 includes a disposition that creates a lease.

[74] The defendant’s position is that the payment was made in exchange for the bundle of rights. In short, the submission is that money was received for and so

“derived ... from” those rights. The rights are contained within the easements or licence as appropriate.

[75] The defendant says that under clause 4.1(c) of the agreement, the plaintiff agreed to grant Transpower an easement over new freehold that the plaintiff owned which formed part of the NSTC. Under clause 4.6(a) of the agreement (and clause 2 of the Tunnel agreement) the plaintiff granted Transpower an access right to use the Tunnel for its cables. Clause 4.6(b) grants Transpower an easement over the Hobson Substation. The whole of the Southern consideration and at least part of the Northern consideration were therefore paid to the plaintiff for the grants of easements and a licence. If the payments had been for the grant of leases of land, the payments would have been considered as premiums derived from leases and so caught by s CC 1. The only question, says the defendant, is whether, because they are paid for the grant of easements or licences, the payments are not therefore derived “from” easements or licences.

[76] The defendant further submits that the only time when payments for rights under easements are made is on a grant. The defendant submits that payments on the grant of an easement are what s CC 1 contemplates. The defendant submits that means that the plaintiff, in fact, derived an amount “from” the licence to use the Tunnel and “from” the easement to use the NSTC.

[78] I do not accept that one can read “from” in this context as meaning “relating to” or “in relation to”. The position can be contrasted by considering the Court of Appeal decision in Shell New Zealand Ltd v Commissioner of Inland Revenue where the Court had to consider payments made by Shell to its employees who were transferred in the course of their employment.²⁶The issue was whether those compensation payments were “in respect of, or in relation to, the employment” of the

²⁶Shell New Zealand Ltd v Commissioner of Inland Revenue (1994) 16 NZTC 11,303 (CA).

were “words of the widest import”.²⁷Counsel for the taxpayer relied on the House of Lords decision in v Hochstrasser v Mayes.²⁸That involved a similar scheme. The taxpayer entered into a housing agreement with the employer under which he was paid compensation for loss on sale of his house upon being required to relocate. The

issue was whether the compensation payment was in respect of an office or employment “and were either profits or gains arising from which” or “profits whatsoever there from”. The House of Lords held that the compensation payments were not derived from the office or employment. The New Zealand Court of Appeal distinguished the decision on the basis that the words are:²⁹

in our view, much narrower in scope than the words in our statute "in respect of or in relation to the employment".

[79] The Southern consideration amount was received for Vector’s agreement to grant a licence, that is the Southern Access Right to Transpower. The source of the amount was the agreement to grant the licence. That arises from clause 6.3 of the agreement between Vector and Transpower, which provides:

In consideration of Vector agreeing to make available the Southern Area for Cables and Equipment ... and thereby diminishing the physical capacity of the Tunnel for Vector to utilise, the parties agree that Transpower shall pay to Vector the sum of $50,000,000 plus GST.

[80] In Romanos Motels Ltd v Commissioner of Inland Revenue, the Court of Appeal had to consider s 88(1)(d) of the Land and Income Tax Act 1954, which provided as follows:³⁰

(1) 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 as far as express provision is made in this Act to the contrary ...

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

³⁰Romanos Motels Ltd v Commissioner of Inland Revenue [1973] 1 NZLR 435 (CA).

[81] The Court was required to determine whether a payment described as a payment of £5,000 made for the “goodwill and lease of the motels” in the agreement was a “premium or other revenue” within the section derived by the objector as the owner of land from a lease.

(ii) Something more is necessary than that the payment has been made as part of the transaction involving the grant of a lease;³³

(iii) There must be some real nexus between the grant of the lease and the payment of goodwill.³⁴

[84] Applying that test to the present case, the rights which are acquired under the easements and the licence are inseparable from the easements and the licence. The payment for those rights are derived from the licence or easements. I reject, as did the Court of Appeal, that there must be a reference to the payment in the licence or easement. Accordingly, if I were required to determine whether the payment was derived from the licence or the easements, I would find that it has been.

[85] The third issue, which does not need to be determined in this judgment, raised the question of whether there should be some apportionment if in fact a finding was made against the plaintiff in respect of the first two issues and in respect

_{of the payment made relating to the NSTC payments. I do not determine
this issue}

because I am not satisfied that an appropriate basis, even if apportionment was possible for assessing, how an apportionment should be made. The onus of proof is of course is on a taxpayer.³⁵I am not satisfied that that has been discharged. Had the outcome on the first issue been different, there may well have been justification for granting leave to address further submissions and evidence on this issue. In the circumstances, because it is not necessary, I simply advance this issue no further.

(i) Declaring that the payments made in respect of the Southern Access Right and for the Northern Easements do not constitute income under s CC 1 of the Income Tax Act 2007; and

[87] I reserve costs so that the parties can discuss same. In the event that there is no agreement, the party seeking an order for costs shall file and serve submissions in support, which shall be followed at 14 day intervals by submissions in opposition and reply. The Case Officer shall refer counsel’s memorandum to me when they are

BETWEEN	VECTOR LIMITED Plaintiff
AND	THE COMMISSIONER OF INLAND REVENUE Defendant

High Court of New Zealand Decisions

Vector Limited v Commissioner of Inland Revenue [2014] NZHC 2069 (29 August 2014)