Article
Commissioner of Inland Revenue v Vector Limited
Tax Alert - September 2016
By Emma Marr and Brad Bowman
On 12 August 2016, the Court of Appeal released its judgment in Commissioner of Inland Revenue v Vector Limited, confirming that income earned by Vector Limited (Vector) in exchange for granting Transpower rights to a tunnel and overhead corridor was not taxable. The appeal follows Vector’s success in the High Court, which was reported in our October 2014 Tax Alert.
Although the law has since been amended to ensure that any such receipt would be taxable income if it were received now, the Court of Appeal made some useful observations regarding the hurdles Parliament and the Commissioner of Inland Revenue must jump to successfully categorise receipts as taxable revenue rather than non-taxable capital receipts.
The Commissioner of Inland Revenue argued that the specific provision in question was intended to tax what had previously been seen as capital receipts, but the Court of Appeal agreed with the High Court that there was simply not enough intention evident in the legislation to confirm that this was the case. Without clear evidence that Parliament intended to tax capital receipts, the Court was not prepared to conclude that the legislation had that effect.
Background facts
Vector owns two key assets in the Auckland electricity distribution system: an underground tunnel that runs from the central city to Penrose, and the North Shore Transmission Corridor ("the Assets"). In June 2010, Vector entered into an agreement that allowed Transpower to use the Assets, by granting various easements and licences, and transferring certain rights to Transpower to enable Transpower to distribute electricity to the national grid. In return Vector received a payment of $53 million.
The primary issue was whether the receipt of that payment by Vector was “other revenues” under section CC 1(2)(g) of the Income Tax Act 2007 ("ITA 2007") or a non-assessable capital payment. A secondary issue was whether the amount was consideration for Vector agreeing to permanently give up part of its income producing asset (and non-taxable), or if it was simply a payment for the use of Vector’s land (which would be taxable) – in other words, it was really a payment of rent in advance.
The arguments and the judgment
The Commissioner’s primary argument on the first issue was that section CC 1 codified the law as part of a coherent, overarching scheme to tax income from specified uses of land, short of a disposal. Further, “other revenues” in section CC 1(2)(g) included sums of a capital nature.
The Court of Appeal did not agree, finding that the legislative history showed no such coherent, overarching scheme for the taxation of receipts from land use. Section CC 1 taxes the specific amounts that are listed in the section, and nothing more. The fact that these amounts may be received by a person from specified uses of land which fall short of a disposal does not mean that every amount of income derived from the use of land that falls short of a disposal is taxable.
The meaning of “other revenues” in section CC 1 is critical, and the Court of Appeal held that “other revenues” must, in this context, refer only to revenue (not capital) receipts. To tax capital receipts, a specific intention to do so must be evident. No such intention was evident.
In fact, given later legislative developments, it seemed even clearer that section CC 1 did not include capital receipts. The Court pointed out that the legislation was amended after Vector and Transpower entered into the agreement by adding section CC 1B of the ITA 2007, which specifically provides that payments received in consideration for the grant, renewal, extension or transfer of a lease or licence are assessable income. As the Court noted, if this income were already assessable under section CC 1(2)(g), the new section CC 1B would not be necessary. Although the Court noted that legislative developments that take place after a disputed transaction cannot always cast light on how the law should be interpreted at the time of the transaction, this was a proper case to do so.
The Commissioner’s second argument, that the payment made by Transpower was actually rent disguised as a lump sum payment, was also dismissed. The agreement entered into between the parties permanently impaired Vector’s ability to use the Assets. This amounted to a permanent disposition of property interests, which is clearly capital in nature.
The Court of Appeal accordingly dismissed the Commissioner’s appeal concluding that the payment was capital in nature and that “other revenues” in section CC 1(2)(g) did not include capital receipts.
Concluding remarks
A strong emphasis of the Court of Appeal judgment was the need to focus on the detailed wording of a taxing provision, read in context and in its most natural sense. This will give the best indication of the purpose of the provision. In their most natural sense, and in the context of the “traditional capital/revenue distinction,” the words “other revenues” were meant to capture revenue receipts. This case, read together with the High Court decision, supports the argument that capital gains should only be taxed where the legislation clearly prescribes this outcome.
If you have any questions in relation to this article, please contact your usual Deloitte advisor.