EASY PARK LIMITED v COMMISSIONER OF INLAND REVENUE [2018] NZCA 296

EASY PARK LIMITED v COMMISSIONER OF INLAND REVENUE [2018] NZCA 296 [7 August 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA505/2017[2018] NZCA 296BETWEEN EASY PARK LIMITEDAppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 21 March 2018Court: French, Cooper and Asher JJCounsel: G J Harley and R L Goss for AppellantA B Goosen and S K Jameson for RespondentJudgment: 7 August 2018 at 3 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on aband A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Asher J)Introduction[1] The question of whether a receipt is to be treated as of a revenue nature or acapital nature for the purposes of income tax has been central to many tax judgments,and it is central to the case before us. It arises in the context of a payment by a tenantto a landlord for the surrender of a lease. The background facts can be summarisedshortly.Background[2] The appellant, Easy Park Ltd (Easy Park), was incorporated in August 2002.It was formed for the sole purpose of undertaking commercial rental propertyinvestments. Easy Park has never had any employees and never occupied anypremises. Its affairs appear to have been run by a Wellington company director,Marlene Stirling, on behalf of the interests of a family based in Melbourne.[3] In 2003 Easy Park acquired two commercial buildings in Wellington. Sincethen Easy Park's business has consisted of leasing those two properties. One issituated in Petone. The other is a four-storey building situated at 312 Lambton Quay(the Whitcoulls Building) in Wellington's central business district. It is the lease ofthe Whitcoulls Building that gives rise to the present dispute.[4] When Easy Park purchased the Whitcoulls Building it was subject to a lease toWhitcoulls Group Ltd (WGL) of levels 1, 1A and 2. Easy Park purchased theWhitcoulls Building, subject to the lease to WGL, for $7.7 million. The lease was fora term of 12 years and three months commencing on 1 June 2003. The initial annualrent was $966,012 plus GST. WGL was responsible for the payment of insurance.Levels 3 and 4 were untenanted at the date of acquisition. On 21 February 2011Easy Park leased levels 3 and 4 of the Whitcoulls Building to the Lifestyle Gym.[5] On 17 February 2011 WGL was placed into voluntary administration.The administrators of WGL sold its business and assets to Whitcoulls 2011 Ltd(W2011). W2011 then took occupation of the Whitcoulls Building, initially withoutan assignment of the lease to WGL. In June 2011 W2011 publicly announced that itwould be vacating the Whitcoulls Building.[6] In August 2011 WGL assigned its lease to W2011 with effect from21 June 2011. At that stage the remaining term of the lease was three years and threemonths. Easy Park and W2011 entered into negotiations for early termination of thelease in November 2011. They agreed on an amount of $1.1 million to be paid byW2011 to Easy Park for early surrender (the lease surrender payment).On 7 February 2012 the parties entered into a deed of surrender of lease providing fora surrender date of 30 June 2012. The lease surrender payment was paid on14 February 2012.[7] In the meantime, in March 2011 the Wellington City Council had given noticeto Easy Park that the Whitcoulls Building was earthquake prone and had to bestrengthened by 29 March 2015, a date later corrected to 29 March 2025.[8] Easy Park decided it was necessary to carry out the earthquake strengtheningbefore it re-leased the building. In August 2012, after unsuccessful negotiations witha supermarket chain, Easy Park reached an agreement in principle to lease levels 1,1A and 2 to clothing retailer Hallenstein Glassons Ltd (Glassons). The lease toGlassons was to commence six weeks after practical completion of the strengtheningwork. An agreement to lease was signed on 5 December 2012. The lease term wasnine years. The annual rent was $1.1 million.[9] On 27 November 2012 Easy Park entered into a deed of surrender of lease withthe Lifestyle Gym, thereby terminating the lease of levels 3 and 4. Easy Park obtainedvacant possession of the Whitcoulls Building on 28 February 2013 and commencedearthquake strengthening. Those works were completed in September 2013 andGlassons commenced its lease on 30 September 2013. Level 4 was leased toHarrison Grierson in November 2014. Level 3 was and remains vacant.[10] In its income tax return for the year ended 31 March 2012, Easy Park treatedthe receipt of the lease surrender payment as a non-taxable capital amount. Thecovering letter to the Commissioner of Inland Revenue (the Commissioner) dated14 September 2012 explicitly drew attention to the tax treatment of the lease surrenderpayment.[11] The Commissioner disagreed and assessed the surrender payment as beingbusiness income subject to income tax in the sum of $308,000. The Commissioneralso imposed a shortfall penalty of $30,800 (10 per cent).[12] The position taken by the Commissioner was predictable. In a public ruling(BR PUB 09/06) (the Ruling) made under s 91D of the Tax Administration Act 1994in 2006, the Commissioner had stated that lease surrender payments received by alandlord who is in the business of leasing property would be treated as taxableincome.1 Such payments are income derived from business under s CB1(1) of theIncome Tax Act 2007 (the ITA). That section provides:Income(1) An amount that a person derives from a business is income of theperson.Exclusion(2) Subsection (1) does not apply to an amount that is of a capital nature.[13] The Ruling recognised one exception. Where a lease is of such significance tothe landlord's business that its surrender constitutes the loss of a "structural asset", apayment received upon surrender will be a capital amount.[14] The ITA has since been amended to provide explicitly that a lease surrenderpayment is income in the hands of the recipient.2 However, these provisions do notapply to the payment in this case, which was received before the amendments tookeffect.High Court[15] In the High Court Ellis J concluded that the lease surrender payment was arevenue and not a capital receipt in Easy Park's hands.3[16] Ellis J determined that a lease surrender payment made by a tenant is "usually"capital in the hands of the tenant because the lease itself is a capital asset.4 But shedid not agree that this meant that the lease was necessarily a capital asset in the hands1 The legal effect of a public ruling is that where the ruling applies and a taxpayer has appliedtaxation law in accordance with the ruling, the Commissioner must likewise apply taxation law inrelation to the person and the arrangement in accordance with the ruling: Tax AdministrationAct 1994, s 91DB(1).2 Income Tax Act 2007, s CC 1C (effective from 1 April 2013).3 Easy Park Ltd v Commissioner of Inland Revenue [2017] NZHC 1893.4 At [90(a)].of the landlord. Easy Park's core and only business was commercial leasing.5Therefore:6[T]he lease is not part of [Easy Park's] underlying business structure and isnot only indirectly connected with producing revenue. Rather, the lease is thevery mechanism which generates profit for the company; it is Easy Park's corebusiness.[17] Therefore, the payment was income in nature. From the perspective of acommercial lessor such as Easy Park, the reversion of one of its leasehold interestsmust "almost by definition" be temporary, as indeed it proved to be.7 It did not createan asset or advantage of an enduring nature. The revenue-producing asset that was thesubject of the lease could be, and was, made the subject of another lease.8[18] The Judge observed (without deciding) that there may be two possibleexceptions to this. First, if the lease had been surrendered near the beginning of a verylong term.9 Second, if the interest that was returned to Easy Park as a result of thesurrender was so damaged or different from the original leasehold interest that hadbeen granted, that Easy Park could not easily enter into a new lease for the buildingon broadly similar terms. However, the Judge considered that neither exceptionapplied in this case.10[19] Therefore, Ellis J upheld the Commissioner's classification of the leasesurrender payment as taxable income. However, the Judge quashed theCommissioner's imposition of a shortfall penalty of $30,800, finding that the taxposition taken by Easy Park was not "unacceptable".11 The question of the shortfallpenalty does not arise on appeal.General principles[20] Under s CB1 of the ITA, income of a person includes an amount the personderives from business, unless that amount is capital in nature. "Income" and "capital"5 At [93].6 At [80].7 At [82].8 At [92].9 At [83].10 At [82]–[85].11 At [95]–[97].are not defined in the ITA. Whether a receipt is income or capital has been left to thecourts to decide in the particular circumstances of each case. There is no singleformula or bright-line rule.[21] The governing approach in New Zealand is summarised by the observations ofLord Pearce in BP Australia Ltd v Commissioner of Taxation of the Commonwealthof Australia, adopted by this Court in Commissioner of Inland Revenue v ThomasBorthwick & Sons (Australasia) Ltd:12The 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 someof which may point in one direction, some in the other. One considerationmay point so clearly that it dominates other and vaguer indications in thecontrary direction. It is a commonsense appreciation of all the guidingfeatures which must provide the ultimate answer. Although the categories ofcapital and income expenditure are distinct and easily ascertainable in obviouscases that lie far from the boundary, the line of distinction is often hard to drawin borderline cases; and conflicting considerations may produce a situationwhere the answer turns on questions of emphasis and degree. That answer:"depends on what the expenditure is calculated to effect from apractical and business point of view rather than upon the juristicclassification of the legal rights, if any, secured employed orexhausted in the process":per Dixon J in Hallstroms Pty Ltd v Federal Commissioner of Taxation. Aseach new case comes to be argued felicitous phrases from earlier judgmentsare used in argument by one side and the other. But those phrases are not thedeciding factor, nor are they of unlimited application. They merely crystalliseparticular factors which may incline the scale in a particular case after abalance of all the considerations has been taken.[22] The enquiry into whether a receipt is revenue or capital is intenselyfact-specific. Therefore in approaching the authorities we acknowledge the oft-citedcaution of Richardson J in Commissioner of Inland v McKenzies (NZ) Ltd:13 the capital income field is an intellectual minefield in which the principlesare elusive and analogies are treacherous.12 BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia [1966] AC 224(PC) at 264–265 (footnotes omitted); and Commissioner of Inland Revenue v Thomas Borthwick& Sons (Australasia) Ltd (1992) 14 NZTC 9,101 (CA) at 9,103.13 Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988] 2 NZLR 736 (CA) at 741.Authorities[23] Both parties agree that there are no New Zealand authorities on the taxtreatment of a lease surrender payment received by a landlord, and very few overseasauthorities on the issue. Ellis J identified what she called "two interrelated streams"of relevant authorities.14 The first stream concerns payments made to or by a lesseeon the acquisition or surrender of a lease. The second stream concerns lump sumspaid or received in relation to the creation or termination of contracts not relating tointerests in land.Payments to or by a lessee[24] This line of authority begins with the decision of the King's Bench inCowcher v Richard Mills and Co Ltd.15 In that case a fishmonger leased a shop witha lease term of 14 years. The lease was due to expire in 1923. However the businesswas not profitable and in 1916 the lease was surrendered in consideration for a sumthat was paid by instalments for the next five years. Those sums were duly paid until1921, when the lessor accepted a payment of £600 in satisfaction of all further liability.That £600 sum was held to be a capital payment by the fishmonger lessee, and wastherefore not deductible.16[25] In Mallett (Inspector of Taxes) v Staveley Coal and Iron Co Ltd two miningleases were surrendered in return for a payment made to the lessor.17 The first leasewas for a term of 63 years from 1882, the second for 21 years from 1919. The leaseswere surrendered in 1923. The Court of Appeal held that the payments were capitalin nature and were therefore not deductible by the lessee. Like Ellis J, we note thefollowing statement by Lawrence LJ:18It must be borne in mind that [the lessee's] trade does not consist of acquiringmining leases and selling those mining leases. The Company's business isthat of colliery proprietors, and its trade consists of the winning and the sellingof coal. For the purposes of carrying on that trade it has acquired numerousleases, including the two leases in question in this case. Those two leases, tomy mind, clearly constitute a part of the fixed capital assets of the Company,14 Easy Park Ltd v Commissioner of Inland Revenue, above n 3, at [50].15 Cowcher v Richard Mills and Co Ltd (1927) 13 TC 216 (KB).16 At 221.17 Mallett (Inspector of Taxes) v Staveley Coal and Iron Co Ltd [1928] KB 405 (CA).18 At 421–422.and none the less so because they were acquired without the payment of anycash premium.[26] Greyhound Racing Association (Liverpool) Ltd v Cooper (Inspector of Taxes)concerned the taxability of a payment made to a lessor as consideration for the earlysurrender of a lease of a race track it owned.19 When the lessee went into liquidationthe lessor agreed to the surrender of the lease on the condition that a new companywas formed to take over the lease of the track. The lessee was also required to pay thelessor a sum equal to the difference between the old and new rents. Lawrence J foundthat the receipt was nothing more than a lump sum payment in place of future rent andwas therefore income in the hands of the lessor.20 The Judge also said:21[I]n my opinion the licence here in question was not an agreement whichrelated to the whole structure of the appellant company's business, nor was ita fundamental organisation of their activities The payment of a percentageon gross receipts here was simply a means of arriving at the rent to be paid forthe use of what, it is true, was in fact the company's only capital asset, but itdid not prevent the company from acquiring other capital assets or fromcarrying on its business in connection with such assets in any way it pleased.[27] Next is the decision of the House of Lords in Regent Oil Co Ltd v Strick(Inspector of Taxes).22 Mr Harley for Easy Park described this as the overarching andgoverning authority. In that case the House of Lords had to determine whether lumpsum payments by an oil company to retailers for exclusivity arrangements were of acapital nature. The retailers leased their premises to Regent Oil in return for the lumpsum payment and a nominal rent, with a sublease back by Regent Oil to the retailers,also at a nominal rent. The Court concluded the lump sum payment was of a capitalnature. Lord Wilberforce stated:23Next, as regards the nature of the asset or advantage gained. There arepossibly two ways of regarding this. The first is to treat the payment as madefor a lease of from five years to 21 years, ie, for a legal estate in land; thesecond, which I prefer, and which fits most closely to what Dixon J said in theHallstroms case, is to treat it as made for the granting of a lease which was (aspart of the single bargain) to be subject to a sublease containing an exclusivitycovenant by the sublessee with provisions making that covenant effective.So regarded, the payment was for a solid recognisable asset, evidently (to my19 Greyhound Racing Association (Liverpool) Ltd v Cooper (Inspector of Taxes) [1936] 2 All ER 742(KB).20 At 744.21 At 744.22 Regent Oil Co Ltd v Strick (Inspector of Taxes) [1966] AC 295 (HL).23 At 350 (footnotes omitted). A different approach was adopted by Lord Reid at 315–316.mind) of a capital nature. It was transferable, in a limited market no doubt,but in that market it was valuable: it was a source or foundation for the earningof profits, through orders for petrol to be placed under it: it can fairly bedescribed as a piece of fixed capital which is to be used in order to dispose ofcirculating capital.[28] Lord Wilberforce reached a similar conclusion in Tucker (Inspector ofTaxes) v Granada Motorway Services Ltd where he held that a payment by a tenant toamend an onerous 50-year lease was of a capital nature.24 The lease terms becameonerous as a result of government increases in tobacco taxes, which adversely affectedthe turnover-based rent. His Lordship said:25I think that the key to the present case is to be found in those cases which havesought to identify an asset. In them it seems reasonably logical to start withthe assumption that money spent on the acquisition of the asset should beregarded as capital expenditure. Extensions from this are, first, to regardmoney spent on getting rid of a disadvantageous asset as capital expenditureand, secondly, to regard money spent on improving the asset, or making itmore advantageous, as capital expenditure.[29] In McKenzies this Court found that a lease surrender payment in relation to alease with 38 years to run was a capital expense and therefore not deductible by thelessee.26 Richardson J began by considering the character of the asset involved:27The finding by Tompkins J, not challenged on appeal, is that the lease wasitself a capital asset of the company. A lease will be held on revenue accountif the taxpayer trades in leases so that the leases form part of its trading stockor are otherwise regarded as circulating capital. Here, as in the case of mosttaxpayers, the lease was part of the profit making structure of the business.[30] The Judge reasoned that, unless other countervailing factors are present, a lumpsum payment made in consideration of the surrender of a lease held on capital accountought to be regarded as an expenditure of capital:28[I]n an uncomplicated case the characterisation of the asset acquired ordisposed of will determine the character or quality to be attributed to the costsof acquisition or disposal, as the case may be. Just as moneys spent on theacquisition of a capital asset are prima facie regarded as capital expenditure,so too the proceeds of the disposal of a capital asset or the costs of its disposalwhere it has a negative value should in the ordinary course have the samecharacter.24 Tucker (Inspector of Taxes) v Granada Motorway Services Ltd [1979] 1 WLR 683 (HL).25 At 686.26 Commissioner of Inland Revenue v McKenzies (NZ) Ltd, above n 13.27 At 741.28 At 741–742.If, as here, the lease is a capital item, then in an uncomplicated case where alump sum payment is seen to be the cost of disposing of that capital item, theexpenditure involved ought to be regarded as capital expenditure. The interestof the lessee confers reciprocal rights and obligations. The lessee has the rightto possession and the obligation to make the rental payments and otherwiseperform the terms and conditions of the lease. The surrender of a lease is asurrender of the whole interest of the lessee under the lease and it is fallaciousto focus narrowly on the extinguishment of the rental obligation withoutrecognising that at the same time the right of possession has been relinquished.Unless there are other complicating factors present which lead to a differentconclusion, a lump sum payment made in consideration of the surrender of alease held on capital account ought to be regarded as an expenditure of capital.[31] Finally, in Commissioner of Inland Revenue v Wattie, an accountancy firmreceived a lump sum payment to induce their entry into a lease at an above-marketrent.29 The Privy Council found that the payment was capital in nature. Although thelump sum was calculated to compensate for the above-market rent, it could not beattributed to a particular year. Lord Nolan reasoned:30The crucial question is whether in all the circumstances the payment or receiptcan properly be attributed to a particular year. The question is crucial becauseincome tax is charged annually upon the income or profits of each year. If thepayment or receipt cannot properly be brought into the income tax reckoningfor a particular year then (apart from special statutory provision) it cannot bebrought into that reckoning at all.Sums paid or received in relation to the creation or termination of a contract[32] We begin this line of authorities with British Insulated and Helsby Cables Ltdv Atherton, a case concerning the deductibility of a lump sum paid to establish thenucleus of a pension fund for employees of a company.31 Viscount Cave LCelucidated the following principle:32[W]hen an expenditure is made, not only once and for all, but with a view tobringing into existence an asset or an advantage for the enduring benefit of atrade, I think that there is very good reason (in the absence of specialcircumstances leading to an opposite conclusion) for treating such anexpenditure as properly attributable not to revenue but to capital.The payment was held to be of a capital nature and not deductible by the payer oremployer.29 Commissioner of Inland Revenue v Wattie [1999] 1 NZLR 529 (PC).30 At 539.31 British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205 (HL).32 At 213–214.[33] That principle was applied in Anglo-Persian Oil Co Ltd v Dale where thetaxpayer had appointed agents to manage their oil and petroleum business in Persia inreturn for commission payments.33 Later the taxpayer made a lump sum payment toextract itself from the agency agreement. It was held that the payment in question didnot bring into existence any asset, and could not properly be said to have brought intoexistence an advantage for the enduring benefit of the company's trade.34 The sumwas held to be deductible by the payer. Lawrence LJ said:35It is not open to doubt that under ordinary circumstances where a trader, inorder to effect a saving in his working expenses, dispenses with the servicesof a particular agent or servant, and makes a payment for the cancellation ofthe agency or service agreement, such a payment is properly chargeable torevenue; it does not involve any addition to or withdrawal from fixed capital;it is purely a working expense.This principle has come to be known as the "identifiable asset test".[34] Van Den Berghs Ltd v Clark (Inspector of Taxes) concerned the taxability of anamount received following termination or surrender of a contract, as opposed to thedeductibility of a payment in those circumstances.36 The taxpayer company receivedan amount in consideration for the termination of a number of profit-poolingagreements 13 years in advance. The House of Lords determined the receipt wascapital in nature. Lord Macmillan reasoned that the surrendered agreements went tothe whole structure of the taxpayer's profit-making apparatus:37The three agreements which the appellants consented to cancel were notordinary commercial contracts made in the course of carrying on their trade;they were not contracts for the disposal of their products, or for theengagement of agents or other employees necessary for the conduct of theirbusiness; nor were they merely agreements as to how their trading profitswhen earned should be distributed as between the contracting parties. On thecontrary the cancelled agreements related to the whole structure of theappellants' profit-making apparatus. They regulated the appellants' activities,defined what they might and what they might not do, and affected the wholeconduct of their business.33 Anglo-Persian Oil Co Ltd v Dale [1932] 1 KB 124 (CA).34 At 147–148.35 At 139–140.36 Van Den Berghs Ltd v Clark (Inspector of Taxes) [1935] AC 431 (HL).37 At 442.[35] The taxability of a lump sum termination payment received in exchange for thesurrender of a contract was also in issue in Commissioner of Inland Revenue v ThomasBorthwick & Sons (Australasia) Ltd.38 Richardson J observed that the long-termsupply and marketing contract in question was of fundamental significance to thetaxpayer's operations.39 It was part of the framework the taxpayer used to generateprofit. Relying on Van Den Berghs, Richardson J found that the contract was a capitalasset, therefore the lump sum for its early termination was received on capitalaccount.40[36] Finally in Birkdale Service Station Ltd v Commissioner of Inland Revenuethis Court held that the question of whether a payment for an asset is received ascapital or income turns on the nature of the asset in the hands of the seller.41 That caseconcerned lump sum payments made to the appellants by Mobil Oil(New Zealand) Ltd in connection with their entry into exclusive supply agreements.The payments were held to be revenue in the hands of the appellants because, byentering into the agreements, the appellants had not changed the structures of theirexisting business and had not foregone any existing advantage.42The submissions[37] Mr Harley's submissions rested on a key underlying premise: that the lease toWGL and later W2011 was a subset of Easy Park's freehold interest in theWhitcoulls Building itself. The purchase price for the land paid by Easy Park,$7.7 million, included consideration for the lease to the then anchor tenant, WGL.In other words, the price paid was a composite consideration for the building, subjectto the existing lease. Mr Harley submitted that it follows logically that theWhitcoulls Building and the lease to WGL were part of the same identifiable capitalasset purchased by Easy Park.[38] Mr Harley submitted that interests in land, whether freehold or leasehold, areabout as far in capital territory as it gets for most firms, whether landlords or tenants.38 Commissioner of Inland Revenue v Thomas Borthwick & Sons (Australasia) Ltd, above n 12.39 At 9,105.40 At 9,105.41 Birkdale Service Station Ltd v Commissioner of Inland Revenue [2001] 1 NZLR 293 (CA) at [53].42 At [76].Therefore, when a firm purchases land and buildings already subject to leases withtenants, the price paid for that asset is inherently capital and the leasehold is part ofthe landowner's business structure. Any amount received upon disposal of that assetis therefore also capital in nature. Applying the identifiable asset test approved inRegent Oil, the payment received in exchange for the surrender of the lease is apayment for the extinguishment of part of a capital asset. Therefore, the receipt iscapital in nature. In effect, the lease surrender payment operated as an adjustment ofthe purchase price paid for the original asset, being the Whitcoulls Building as well asthe lease to WGL, to reflect the loss of the lease.[39] Mr Goosen for the Commissioner rejected Mr Harley's contention that thelease to WGL formed part of the interest in land acquired upon purchase of theWhitcoull's Building. Under the agreement for sale and purchase, the propertypurchased was the fee simple and the price paid was for the fee simple only. ThatEasy Park would not have purchased the building without a lease in place does notchange that legal arrangement.[40] Mr Goosen emphasised the need to determine the issue by reference to thenature of the taxpayer's business. For Easy Park, a company in the business of leasingcommercial premises, the lease was a revenue asset in the nature of trading stock.When considered from a practical and business point of view, the payment was madeto compensate Easy Park for the loss of rental, which is indisputably income.[41] As an alternative argument, Mr Harley submitted that the termination of thelease to WGL had a profound and permanent effect going to the very core ofEasy Park's business, indicating that the payment was capital in nature. Mr Harleysubmitted that Easy Park faced serious financial loss when the lease was surrenderedand had to rely on shareholder support to remain solvent. The Whitcoulls Buildingcould not be re-let without expenditure of almost $9 million on earthquakestrengthening. Moreover, the lease to Glassons following the earthquakestrengthening was less favourable and required Easy Park to meet the cost ofinsurance, unlike the previous lease to WGL.[42] In response, Mr Goosen submitted that the termination of the lease did not alterEasy Park's capital asset, the Whitcoulls Building. Therefore, the structure of thebusiness remained the same. When the lease was terminated Easy Park was able touse the Whitcoulls Building to generate profit by entering into a new lease withanother lessee.Analysis[43] We deal first with the core submission advanced by Mr Harley, that is theproposition that the lease to WGL was part of the capital asset acquired by Easy Parkwhen it purchased the freehold in the Whitcoulls Building.[44] Under the sale and purchase agreement, Easy Park purchased the freehold inthe Whitcoulls Building. That freehold is clearly a capital asset. Whilst the existenceof the lease is noted, Easy Park contracted to purchase the "fee simple" for "one lumpsum" of $7.7 million. Contrary to Mr Harley's submission, we do not consider thatthe lease to Whitcoulls can be "tacked on" to the capital asset, being the underlyingland, by virtue of the lease being in place when the property was purchased. Easy Parkdid not acquire a leasehold interest in land. It acquired a freehold estate that wassubject to a lease. The owner of the leasehold interest was WGL and later W2011.[45] We accept that the existence of the lease was an important part of the businesscase for purchasing the Whitcoulls Building and Easy Park would not have purchasedthe building without it. However, that cannot alter the underlying legal arrangement,which provided for the payment of a purchase price in respect of the fee simple only.We note the following general observations of Richardson J in McKenzies:43While it may not be appropriate to allow the intricacies of the law of propertyto dominate the interpretation and application of tax legislation where theobjects, concepts and thrust may be quite different, it is well settled that thetrue nature of a transaction must be ascertained by reference to the legalarrangements actually entered into and carried out and taking into accountsurrounding circumstances, and the documents themselves may be brushedaside only if and to the extent that they are shams or the legislation itself sorequires.43 Commissioner of Inland Revenue v McKenzies (NZ) Ltd, above n 13, at 742.[46] The nature of a receipt for income tax purposes depends on what the amountreceived was calculated to effect from a practical business point of view. We refer tothe following statement of Richardson J in AA Finance Ltd v Commissioner of InlandRevenue:44Whether gains produced in a business are revenue or capital depends on thenature of the business and the relationship of the transactions producing thegain to the conduct of the business. A transaction may be part of theordinary business of the taxpayer or, short of that, an ordinary incident of thebusiness activity of the taxpayer although not its main activity. A gain madein the ordinary course of carrying on the business is thus stamped with anincome character.[47] Easy Park's sole business was leasing commercial properties. It generatedincome in the form of rent for those properties. That rent is indisputably income.The lease surrender payment in the hands of Easy Park essentially had the samecharacter as the payment of rent. It was a lump sum made on account of the rentforegone by the landlord. From a practical business point of view, the payment wasincome.[48] This is not to suggest that, because the amount of the early surrender paymentmay have been determined by reference to rent lost, it was necessarily received asrevenue. The authorities are clear that the character of a receipt is not to be determinedby the measure or method used to quantify the payment.45[49] We consider that the termination of the lease and the associated receipt,although unwelcome, constituted part of the ordinary business activities of Easy Park.Easy Park is a commercial lessor. The early termination of lease contracts andpayments in compensation for such are part and parcel of that business. Ultimately,Easy Park's profit-making structure went unchanged. The termination of the lease didnot affect the underlying capital asset, the Whitcoulls Building. The leasehold interestand right to possession reverted to Easy Park upon termination, meaning that it could,and did, find a replacement lessee. We agree with Ellis J that the lease surrender was44 AA Finance Ltd v Commissioner of Inland Revenue (1994) 16 NZTC 11,383 (CA) at 11,39l.45 Regent Oil Co Ltd v Strick, above n 22, at 349; and Commissioner of Inland Revenue v Wattie,above n 29, at 537–538.simply an ordinary if unwanted incident of Easy Park's core and only business ofcommercial leasing.46[50] The authorities relied upon by Mr Harley are distinguishable. Mr Harley reliedprimarily on Regent Oil. He described this as a "landlord payments" case. We agreewith Mr Goosen that this is a misdescription. The premium in that case was paid byRegent Oil as lessee of the retailer's premises under the head lease. It is therefore alessee payment case. In the hands of the lessee, the lease was a capital asset, being apart of the underlying profit-making structure of the business.47 In the present case,the payment is received by Easy Park as lessor. In the hands of a lessor engagedexclusively in the business of commercial leasing, such as Easy Park, the lease washeld on revenue account.[51] McKenzies, also relied upon by Mr Harley, looked at the same issue in thepresent case from the perspective of the lessee. The lease in question was forwarehouse premises from which goods were transferred to the taxpayer's retail stores.It was not part of the lessee's trading stock, but rather formed part of the profit-makingstructure of the business.48 In contrast, the present case concerns a lessor whose solebusiness is commercial leasing.[52] In Wattie, the premium received by the accountancy firm to induce its entryinto an onerous lease was found to be capital in nature. Lord Nolan noted:49[I]t was common ground before Their Lordships that the $5m was not a receiptarising from Coopers and Lybrand's ordinary business operations whichconsist, of course, in the practice of the accountancy profession.In the present case the receipt arose from Easy Park's ordinary business operations.[53] We note the Canadian case of Monart Corp v Minister of National Revenue, inwhich the taxpayer received a lease surrender payment for the cancellation of a leasesix years early.50 It was held that the payment was profit derived in the ordinary course46 Easy Park Ltd v Commissioner of Inland Revenue, above n 3, at [88].47 Regent Oil Co Ltd v Strick, above n 22, at 350–351.48 Commissioner of Inland Revenue v McKenzies (NZ) Ltd, above n 13, at 741.49 Commissioner of Inland Revenue v Wattie, above n 29, at 535.50 Monart Corp v Minister of National Revenue [1967] CTC 263 (Ex).of the lessor's business of leasing commercial property, and was therefore revenue innature.51[54] We also reject Mr Harley's argument that the financial impact of thetermination was such that it affected the structure and core of Easy Park's business.Mr Harley's submissions on this point conflate the consequence of the surrender ofthe lease with the costs Easy Park incurred to carry out earthquake strengthening.We accept that the cost of that work threatened Easy Park's solvency, and it was forcedto rely on shareholder support. However, it was Easy Park's choice as to whether toconduct earthquake strengthening upon surrender of the lease. We accept that it wassensible for Easy Park to do so in order to give it the greatest chance of securing a newtenant. However, it does not follow that the lease surrender was the cause of the costof the earthquake strengthening work. During the completion of the restoration work,Easy Park secured a new tenant without even needing to advertise the property. Thatis unsurprising, given its size and location.[55] The first tax year in which rental income was earned during the whole yearafter the work was completed was the year ended 31 March 2015. In that yearEasy Park received rental income of $1.1 million from Glassons compared to rentalincome of $1,161,097 from W2011 in the year ended 31 March 2012 (the last yearbefore the earthquake strengthening work impacted rental income). Accordingly, apartfrom having to pay insurance on the building (a cost previously borne by WGL andthen W2011) Easy Park's business continued after the earthquake work as before.Result[56] The appeal is dismissed.[57] The appellant must pay the respondent costs for a standard appeal on a band Abasis and usual disbursements.Solicitors:Chapman Tripp, Wellington for AppellantCrown Law Office, Wellington for Respondent51 At 271.