MERCURY NZ LIMITED v COMMISSIONER OF INLAND REVENUE [2019] NZHC 1524

MERCURY NZ LIMITED v COMMISSIONER OF INLAND REVENUE [2019] NZHC 1524 [1 July 2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2017-404-000169CIV-2017-404-000517[2019] NZHC 1524BETWEEN MERCURY NZ LIMITEDPlaintiffAND THE COMMISSIONER OF INLANDREVENUEDefendantHearing: 17-21 June 2019Appearances: L McKay, L Fraser and W Cheyne for the PlaintiffV Casey QC, P Courtney and C L White for the DefendantJudgment: 1 July 2019JUDGMENT OF HINTON JThis judgment was delivered by me on 1 July 2019 at 4.45 pmpursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarCounsel/Solicitors:Victoria Casey QC, WellingtonLindsay McKay, Barrister, AucklandChapman Tripp, AucklandCrown Law Office, WellingtonInland Revenue – Legal Services, Wellington[1] This case concerns the depreciation rate for turbine halls at Mercury'sKawerau and Nga Awa Purua geothermal powerstations. (Nga Awa Purua isreferred to by the rather less attractive name of NAP.)[2] The issue in dispute is whether the turbine halls fall within the definition of"building" under the Income Tax Act 2007 (the Act) as the Commissioner states,and are therefore subject to a depreciation rate of 0%, or whether they are to betreated as part of the gantry cranes situated within the halls, and subject to adepreciation rate of 9.6%, as claimed by Mercury.[3] That issue is reflected in Mercury's Notice of Proposed Adjustment(NOPA),1 the statements of claim, the statement of issues in the parties' jointmemorandum of 30 May 2017, and in the agreed summary of facts.[4] The issue identified in Mercury's opening submissions (filed over a yearago), was materially different. However, it was ultimately, and helpfully, restatedas above.[5] The parties agree that if I find the turbine halls are not buildings, and alsofind they do not qualify for depreciation at the gantry crane rate, the case is to beadjourned so they can confer on what would be the appropriate description anddepreciation rate of the turbine hall for tax purposes.Background[6] Mercury owns (or jointly owns) a number of geothermal powerstations. Ageothermal powerstation is made up of a large number of structures, including apowerhouse, cooling tower, and steam separators. Annexure "A" is a photo of theNAP geothermal powerstation.[7] The powerhouse, which forms part of each powerstation, incorporates aturbine hall and any attached annex housing electrical equipment and other plant.1 Dated 22 July 2016.[8] The turbine hall (the focus of this case) houses the main generating plant(turbines, generators, and other equipment). It also houses a gantry crane, a largeoverhead crane suspended over the operating floor, which is critical formaintenance of plant and can move plant from one point in the hall to any otherpoint. The crane is fixed to a support structure. Mr Brookie (Mercury's expertwitness) describes this as a "braced box" made up of vertical, diagonal andhorizontal beams. Its appearance is of bracing built into the walls and roof.[9] Not all geothermal powerstations have a powerhouse/turbine hall. AmongstMercury's geothermal powerstations, Kawerau and NAP both operate what isreferred to as a "flash" process and have a powerhouse. Another powerstation atNgatamariki operates what is referred to as a "binary" process and does not have apowerhouse. Binary turbines and generators in fact have to be outside. Rotokawa,to which I refer subsequently, operates both flash and binary processes and has apowerhouse to house its "flash" turbine and generator, while the binary turbinesand generators are located outside.[10] There is no material difference for purposes of this proceeding between theKawerau and NAP powerhouse/turbine hall.[11] Before 1 July 2011, there was no issue over depreciation treatment of theKawerau and NAP geothermal powerhouses/turbine halls. They were depreciatedas "structures (default class)" with an estimated useful life (EUL) of 50 years anda depreciation rate of 4%. The gantry cranes operating inside the turbine halls wereincluded in the total amount capitalised for the powerhouse. This meant they werenot separately depreciated and were depreciated as part of the "structures (defaultclass)" at the rate of 4%. The foundation for the turbines and generators (known asthe TG Foundation, which is set within the turbine hall, but is a separate structure)was also included in the total amount capitalised for the powerhouse anddepreciated as part of the "structures (default class)" at the 4% rate.[12] On 1 July 2011, the Taxation (Budget Measures) Act 2010 came into force(the 2010 Budget Act). That Act set the depreciation rate for buildings with an EULof 50 years or more at 0% with effect from the 2012 income year, (and, althoughnot applicable here, for buildings with an EUL of less than 50 years at a rate of 1divided by the EUL).2 This change followed from a recommendation in the reportof the Tax Working Group in 2010.3 The change lead to the issue in this case. Thegantry crane rate was set at 9.6% and the TG Foundation rate at 12%, the same rateas the turbines and generators. There is no issue over any depreciation rate exceptwith regard to the turbine hall.[13] Following the 2010 Budget Act coming into force, Mercury's self-assessment for the income years 2012-2015 was made on the basis that itsgeothermal powerhouses (including NAP, Kawerau and Rotokawa) should beapportioned on a below and above ground basis. It treated 70% of the powerhousecost as below ground and classed as a depreciable "structure" with an EUL of50 years and a depreciation rate of 4%. The remaining 30% of the cost was treatedas above ground and classed as a "building" with an EUL of 50 years and adepreciation rate of 0%. Although there was an earlier suggestion to the contrary,the Commissioner confirms that she does not make anything of the position adoptedby Mercury over that interim period, as compared to its current claim that theturbine hall as a whole should be treated as the gantry crane and subject to a singledepreciation rate of 9.6%.[14] The Commissioner's position was, and remains, that the depreciation ratefor the turbine hall as a building with an EUL of 50 years, is 0%.[15] Mercury, along with others in the electricity industry, negotiated at lengthwith the Commissioner over the issue of the depreciation status of turbine halls(hydro, geothermal and thermal).2 Income Tax Act 2007, s EE28.3 Victoria University of Wellington Tax Working Group A Tax System for New Zealand's Future(Centre for Accounting, Governance and Taxation Research, Victoria University ofWellington, January 2010). As recorded in the foreword, "The Tax Working Group (TWG)was established by Victoria University of Wellington's Centre for Accounting Governance andTaxation Research, in conjunction with the Treasury and Inland Revenue, in May 2009.Although an independent Group, it was formed with the support of the Minister of Finance,Hon Bill English, and the Minister of Revenue, Hon Peter Dunne. The Group's task was toidentify the major issues that Ministers will need to consider in reviewing medium-term taxpolicy and to better inform public debate on tax."[16] Taxpayers can seek provisional or special depreciation rates. They can seeka provisional rate where, for example, it is claimed that an item does not fit wellwithin asset descriptions in the Commissioner's "General depreciation rates"publication (the depreciation table).4 A provisional rate, if set, will apply to thatitem for all taxpayers. A special rate can be sought when a taxpayer considers adifferent rate should apply to their particular item because of the special use it isput to in their business. The special rate will apply only to that taxpayer.[17] Following the electricity sector negotiations, in March 2015 theCommissioner issued "Provisional Determination PROV 26: Depreciation Rate forhydroelectric powerhouses", which provides that a hydro powerhouse has an EULof 100 years and a provisional depreciation rate of 2%.5[18] On 23 February 2016, the Commissioner issued "Provisional DeterminationPROV 27: Geothermal and thermal powerhouses".6 It confirmed theCommissioner's position that geothermal powerhouses have an EUL of 50 yearsand a depreciation rate of 0%. The determination applied retrospectively back tothe 2012 income year.[19] Various IRD notices and assessments followed, leading ultimately to thishearing. It is unnecessary to go into detail about the process that has taken place,or the reason that there are two separate proceedings before me. The parties agreeit is sufficient for me to answer the questions raised, which are the same in the twoproceedings. The parties can take such subsequent procedural steps as are required.[20] This is not an "appeal" against PROV 27. The parties have agreed that thishearing can in the first instance be restricted to the "in principle" question outlinedat the outset. The proceeding is a challenge proceeding under Part 8A of theTax Administration Act. The Court's role is to approach the issue on the merits andreach its own view on whether the position taken by Mercury or the Commissioner4 Inland Revenue General depreciation rates (IR265, April 2019) [the depreciation table].Under s 91AAG of the Tax Administration Act 1994.5 Provisional Determination PROV 26 Depreciation Rate for Hydroelectric Powerhouses(25 March 2015).6 Provisional Determination PROV27: Geothermal and thermal powerhouses (23 February2016).is correct. To the extent my answers may impact on PROV 27, that will be a matterfor the parties, and members of the electricity sector, to consider separately.[21] The financial implications flowing from the different approaches todepreciation of the powerstation/turbine hall are considerable. The additionaldepreciation claimable by Mercury for the 2012–2015 years alone, if the turbinehalls at NAP and Kawerau are held to be depreciable plant (gantry cranes) insteadof buildings, is estimated at $7.4 million.Order of inquiry and burden of proof[22] Section DA 1 of the Act is the "general permission" that allows taxpayersto deduct depreciation loss. "Depreciation loss" is defined by reference to s EE1(2):A person has an amount of depreciation loss for an item for an income yearif—(a) the person owns an item of property, as described in sections EE 2to EE 5; and(b) the item is depreciable property, as described in sections EE 6 toEE 8; and(c) the item is used, or is available for use, by the person in the incomeyear; and(d) the amount of depreciation loss is calculated for the person, theitem, and the income year under sections EE 9 to EE 11.[23] Ownership not being an issue, the first step is to identify the item and thento see if the item is of a type described in ss EE 6–EE 8. Sections EE 6(1) and (2)define "depreciable property" as property, inter alia, that in normal circumstancesmight reasonably be expected to decline in value while it is used or available foruse in deriving assessable income, or carrying on a business for the purpose ofderiving assessable income, and is not described in s EE 7. Section EE 7 confirmsland is not depreciable, but buildings, fixtures, and certain listed improvements aredepreciable if they meet the test in ss EE 6(1)–(2), and there is no dispute the turbinehalls do meet the test. In this and all other respects, ss EE 1(2)(a)–(c) are not atissue here. The issue is s EE 1(2)(d): what the amount of depreciation loss is underss EE 9–EE 11.[24] Sections EE 9–EE 11 are intricate. Suffice to say that their effect in thiscase is that if the item is a building with an estimated useful life of 50 years or more,then the depreciation rate is 0%.7 If not, then the item will have the depreciationrate set under s EE 31(2)(a). This will either be the rate already set by theCommissioner in her depreciation table, or the rate obtained through applying fora provisional or special rate, as described earlier.[25] Considering these provisions, the parties agree that the correct order ofinquiry for determining the rate for depreciation loss (if any) in this case is thefollowing:(a) identify the item of property at issue;(b) determine whether it is a building; and(c) if it is not, determine what it is in terms of the depreciation table. Asstated, I have only to decide at this point if the item is to be treatedas part of the gantry crane. If not, the case is adjourned.[26] The burden of proof is on Mercury as the taxpayer, to persuade me on thebalance of probabilities at each stage of the inquiry. That is not disputed.Question 1: What is the item?[27] In closing submissions, the parties agree that the "item" to be considered isthe turbine hall.[28] The Commissioner's position is that the item is more accurately describedas the powerhouse (turbine hall/electrical annex combined). However, Mercuryhas accepted the Commissioner's assessment of the electrical annex as a building7 I note that is not the same, technically, as an item not being depreciable. Other depreciationprovisions still apply.with a depreciation rate of 0% and it is agreed that nothing turns on that, so forpractical purposes the item can be referred to as the turbine hall.[29] In its opening submissions, Mercury referred to there being three "items" or"civil elements" in question, comprising overall the "turbine hall". Those threeelements are described as:(a) The gantry crane support structural system comprising the vertical,horizontal and diagonal structural supports (including rail beams)for the gantry crane. This is the "braced box" referred to earlier, thatmight appear to a lay person inside the turbine hall to be the wall andceiling framing.(b) The turbine hall base structure comprising four floors or levels ofthe turbine hall, incorporating reinforced concrete slabs supportedby a system of structural steel and below-ground foundations. Thisexcludes the TG Foundation, which is a separate item.(c) The cladding system comprising the clad outer shell (includingroofing) of the turbine halls. This is essentially the exterior wallsand roof.[30] However, Mercury accepts that this breakdown has potential relevance onlyto its argument at the next stage of the inquiry (whether the item is a building) andthat the "item" to be categorised for tax depreciation purposes is the turbine hall(excluding electrical annex and TG Foundation).[31] It is clearly correct that there is only one item. The turbine hall is onestructure (to use a neutral term) and therefore one item for purposes of this inquiry.As Richardson J said, in a slightly different context in Commissioner of InlandRevenue v Waitaki International, it would be totally unreal to suggest that walls,roof and floor could each take on a separate status.8 The three "elements" here are8 Commissioner of Inland Revenue v Waitaki International [1990] 3 NZLR 27 (CA) at 31.the walls incorporating the crane support system, the base structure comprising fourfloors, and the cladding system being the exterior walls and roof.[32] Unsurprisingly, it is also clear from the evidence of Dr Brooke, (expertstructural engineer for the Commissioner), and of Mr Brookie, (expert structuralengineer for Mercury) that the three "elements" are integrated and interdependent.That is, they are part of one unit.Question 2: Is the turbine hall a building?[33] The next point of inquiry is whether the turbine hall is a building.[34] For purposes of this judgment, the turbine hall excludes the TG Foundation,which is a specialised foundation for the turbines and generators, and a structurewhich is separated from the balance of the turbine hall, although contained withinit. The Commissioner has assessed that structure as being plant and allocated it thesame depreciation rate as the turbines and generators, which is not in dispute.[35] Mercury does not dispute, or cannot realistically dispute for purposes of thishearing, that the turbine hall has an EUL of 50 years or more. Mercury's owndesign specification provided that the turbine halls have a physical/design life of50 years or more. I note also that its project asset register specifically lists theturbine halls as having an EUL of 50 years.9[36] As noted above, if the item is not a building, then I have to consider whetherit is to be treated as a gantry crane in the depreciation table. A gantry crane has adepreciation rate of 9.6% being the economic rate fixed for that item.9 There was some suggestion from Mercury in closing that it may be incorrect to say that theturbine halls have an EUL of 50 years or more, on the basis of earlier obsolescence of attachedplant. Mercury says it was prevented from seeking a lower rate by s EE 35(2) of the Act.However, the clear position in terms of the record is as I have stated.Relevant legislation[37] The definition of "building" in the Act is exclusionary only. That is, it doesnot specify what a building is, but only what a building is not:10Building, in sub-parts EE and EZ, does not include – (a) a grandparentedstructure: (b) commercial fit-out.[38] The definition insofar as it excluded grandparented structure wasincorporated into the Act by the 2010 Budget Act.11 The exclusion for commercialfit out was inserted later in 2010 by the Taxation (GST and Remedial Matters) Act2010.12 There was no definition of "building" prior to 2010.[39] The Commissioner's overriding submission is that "building" in the Act isto be given its conventional meaning. She submits, and I agree, that someassistance in discerning the intended meaning can be gained from what is excludedfrom the definition, namely "grandparented structure", and "commercial fit-out",and also from the additional carve-out for "temporary buildings".13[40] The definition of grandparented structure was added in the 2010 BudgetAct. It is defined as meaning "barns, carparks (buildings), chemical works,fertiliser works, powder-drying buildings and site huts" acquired on or before30 July 2009.14 By logical inference, that would mean that any of those items, ifacquired after 30 July 2009 would otherwise fall within the definition of building.That makes it reasonably clear that buildings would include industrial buildingsand buildings that would be considered to be of a specialised industrial nature, asfor example fertiliser works are. In fact, Mr McKay agrees that is the case.[41] "Commercial fit-out" is defined as follows:15 means an item to the extent to which it is –10 Income Tax Act 2007, s YA 1 definition of "building".11 Taxation (Budget Measures) Act 2010, s 96(2).12 Section 132(4).13 Taxpayers are permitted a deduction for loss incurred through the destruction of a temporarybuilding under s DB 20 of the Act.14 Section YA 1 definition of "grandparented structure".15 Section YA 1 definition of "commercial fit-out".(a) plant attached to a commercial building, but not used inside adwelling within the commercial building:(b) attached to, and non-structural in relation to, a building, if the itemis not used for weatherproofing the building and –(i) is not used in relation to, and is not part of, a dwellingwithin the building; or(ii) is used in relation to, but is not part of, a dwelling withinthe building, and the building is a commercial building.[42] "Plant" is again defined only by exclusion, as "[not including] an item thatis structural in relation to a building".16 This definition was also added by theTaxation (GST and Remedial Matters) Act 2010.[43] "Commercial building" is defined as meaning "a building that is not, in partor in whole, a dwelling, unless the use as a dwelling is a secondary and minor use".This means that the "fit-out" provisions apply to all buildings other than dwellings,and therefore apply to industrial buildings. Again, I do not take that to be disputed.[44] The combination of these provisions makes it clear that anything that isstructural in relation to a building, even if it would otherwise be plant, is not plant.It is part of the building for depreciation purposes.[45] "Temporary building" was defined in the Act since prior to the 2010 BudgetAct, but was also amended by the Taxation (GST and Remedial Matters) Act 2010,and now reads:17(a) [Repealed](b) a building that—(i) is erected at a construction site; and(ii) is to be demolished or removed on or before the completion ofthe construction; or(c) a building that—(i) was erected, and is used, to house specific plant or machinery;and16 Section YA 1 definition of "plant".17 Section YA 1 definition of "temporary building".(ii) will have to be demolished to remove or replace the plant ormachinery[46] This makes it clear that even structures erected and used to house specificplant and that are to be demolished once the plant is removed, would fall in theintended definition of building, but are purposefully excluded because they are onlyuseful for the life of the plant.[47] I should add here that it is also clear from the legislation that not everystructure is a building. Industrial facilities such as powerstations have a range ofstructures of varying sizes and complexity. Some structures the Commissioneraccepts are not buildings under the Act (for example, cooling towers) and they aredepreciated in accordance with their specific EUL and depreciation rates set by theCommissioner and the Tax Administration Act 1994 and recorded in thedepreciation table.Ordinary and natural meaning[48] Subject to the above legislative refinements, I consider that the question ofwhat is a building for purposes of depreciation under the Act is to be approachedas a general rule in terms of the ordinary and natural meaning of the word. That isthe accepted approach to interpretation of a word or phrase in legislation where thatmeaning is consistent with the purpose of the provision, and there is no contraryindication in the legislation or elsewhere.18 There is nothing in the legislation thatgives any signal that a building for purposes of the depreciation provisions isanything other than a building in the ordinary sense of the word. It is also clear thatwhat might otherwise be "fit-out" or "plant", if it is "structural" in relation to an(industrial) building, is part of the building and is not treated as plant or fit-out fordepreciation purposes. On the other hand, plant merely attached to an industrialbuilding is not included or treated as a building for tax purposes and can beseparately treated as plant.18 Interpretation Act 1999, s 5(1); Stiassny v Commissioner of Inland Revenue [2012] NZSC 102,[2013] 1 NZSC 453 at [23]; and Terminals (NZ) Ltd v Comptroller of Customs [2013] NZSC139, [2014] 1 NZLR 121 at [39] per Glazebrook J.[49] Mr McKay submitted in opening that a first possible line of reasoning todetermine the meaning of building might be in accordance with the interpretationof building for purposes of the Resource Management Act 1990 and Building Act2004. "Building" in those senses has a special and very broad meaning. Mr McKaydid not of course promote that approach and it was not suggested by theCommissioner that it should be adopted. I need take that no further.[50] In closing, Mr McKay accepts that, at least generally, the common meaningof building would apply.[51] In 2009, before the enactment of the 2010 Budget Act, the Commissionerissued an interpretation statement on the meaning of "building".19 TheCommissioner examined the meaning through the legislation, case law anddictionary sources, and came to the following common description of "building":(a) A building is a structure of considerable size.(b) A building is permanent in the sense that it is designed to be locatedpermanently on the site where it stands. A building is fixed to theland on which it stands. However, a building need not be legallypart of the land on which it stands.(c) A building is enclosed by walls and a roof.(d) A building can function independently of any other structure.However, a building is not necessarily a physically separatestructure.(e) The appearance and function of the structure are relevant indetermining whether a structure is a building for depreciationpurposes (that is, whether the structure looks like the conventionalidea of a building and is designed for the uses to which conventional19 Inland Revenue Interpretation Statement IS 10/02: Meaning Of "Building" In theDepreciation Provisions (IS 10/02, 30 July 2009).buildings are ordinarily put). It is appropriate to ask whether areasonable person would regard the structure as a building.[52] Without examining in detail the cases and other sources the Commissionerused to come to this definition, I consider it is a good working definition ofbuilding. Not all of these indicia need be present in each case. For example, acarpark building often does not have a roof.[53] The Courts have said that the hypothetical view of the reasonable layobserver is useful. Ms Casey QC refers to what she termed "the duck test":20"Building", however, is an ordinary English word, and in this statuteshould be given the meaning an ordinary person would attribute to it. Whatwe have in this case looks like a building. It is almost identical to itsneighbouring structure, which is admittedly a building. It is built like abuilding. It is used like a building. The only reasonable conclusion, inmy view, is that it is a building.[54] The turbine hall certainly looks like a building from the outside, as can beseen from the photo of the NAP powerstation in Annexure "A".[55] In his oral closing submissions, Mr McKay accepts that on a "first blush"basis, applying the common meaning test, the reasonable observer would considerthat the turbine hall is a building at least on the basis of its external appearance.[56] Mr McKay stresses that I have to look both inside and outside the turbinehall.[57] Having viewed numerous photos of both, and applying the reasonablenesstest, I consider a reasonable observer looking both from inside and outside theturbine hall would say it is a building. It fills the function of a building in the senseof enclosing and housing something, in this case a substantial amount of plant. Ithas doors, hallways and large floor areas for people (generally in small numbers)to work and move around in, and to enable placement and movement of plant. Iconsider it meets all of the criteria I described above.20 Metals & Alloys Co v Ontario Regional Assessment Commissioner (1985) 36 RPR 163 at 50.[58] Mr McKay says I should place low priority on the reasonable observer"test" in this case. I disagree that such a common sense approach should be givenlow priority. Asking what a reasonable observer would say seems to me to beanother way of determining whether something is a building in its ordinary andnatural meaning. However, I accept the matter does not end there. The abovefactors, including the reasonable observer test, are not determinative. They arefactors to be considered, but the matter is more nuanced.The Waitaki factor[59] Mr McKay relies on a line of cases where a structure that an ordinary personwould or might say was a building was held not to be – or at least was held to be"plant".[60] As Mr McKay puts it, such cases will not be common. He relies inparticular on what he refers to as the leading New Zealand case of Commissionerof Inland Revenue v Waitaki International Ltd.21 In that case, the taxpayer claimeda deduction for the cost of installing insulating panels on its cold-store buildings.The taxpayer used the panels to construct the interior and exterior walls and roofsof these buildings. At issue was whether these new structures were "plant". TheCourt of Appeal wrote:22The crucial question then as I see it is whether a cold-store or freezer is tobe characterised as a highly specialised setting for the business operations,or whether the building itself plays a significant part in the industrialoperations. If the latter is its function then it is plant.(Emphasis added)[61] The Court of Appeal held that the structures went beyond a mere setting forplant, and that the structures were part of the "apparatus" of the refrigerationprocess, so were plant.2321 Commissioner of Inland Revenue v Waitaki International [1990] 3 NZLR 27 (CA).22 At 31 per Richardson J.23 At 36 per Richardson J.[62] While Mr McKay describes Waitaki as the leading case in New Zealand, healso acknowledges it is probably the only New Zealand case on point.24 Further,while involving a similar point to the present, it is in a different tax context, thequestion in Waitaki being whether the taxpayer should receive a deduction forexpenditure on plant, not application of the depreciation regime.[63] The other cases cited by Mr McKay are also not in relation to depreciation,and come are from other tax jurisdictions.25 I am not sure in any event that theyadd anything to Waitaki.[64] Mr McKay places particular emphasis on the decision of the House of Lordsin Barclay Curle.26 Pursuant to the United Kingdom tax legislation at the time,"industrial buildings" qualified for a certain level of capital allowances, and"machinery and plant" for an allowance of twice as much. The issue before theirlordships was whether a dry-dock constructed by the taxpayer adjacent to theRiver Clyde was "plant". By majority they found the dock was plant. In hisjudgment, Lord Reid cited with approval the findings of the Special Commissioners(the first instance decision makers):27The dry dock was in our view not the mere setting or premises in whichships were repaired. It was different from a factory which housedmachinery, for in the operation of the dock, the dock itself played a part inthe control of water and enabled the valves, pumps and electricitygenerator, which were an integral part of its construction, to perform theirfunctions. The dock was not a mere shelter or home but itself played anessential part in the operations which took place in getting a ship into thedock, holding it securely and then returning it to the river.[65] From these cases, Mercury distils a number of propositions, which Isummarise:24 Mr McKay also cites Lake Pine MDF Ltd v Commissioner of Inland Revenue (1994) 16 NZTC11,001 (HC), but this case is not about the distinction between a building and plant.25 Broken Hill Property Co Ltd v Federal Commissioner of Taxation (1968) ATD 43 (HCA);Inland Revenue Commissioners v Barclay Curle [1969] 1 WLR 675 (HL); Schofield v R andH Hall Ltd (1974) 49 TC 538 (CA NI); Wangaratta Woollen Mills Ltd v Federal Commissionerof Taxation (1969) 119 CLR 1 (HCA).26 Inland Revenue Commissioners v Barclay Curle [1969] 1 WLR 675 (HL).27 At 678.(a) Whether a structure is plant is to be determined by reference to thestructure as a whole and the relationship of that structure to both theoperations carried on within it, and to the "operating" plant withwhich those operations are performed.(b) If that relationship only involves the structure providing no morethan an appropriate or convenient setting for the relevant activity,the structure will not be plant.(c) Commercial structures will highly likely be no more than settings,and so not plant.(d) It is only when a structure is materially integrated with the"operating" plant and equipment within it, or with the industrialprocess carried on within the structure, that the structure becomes,itself, plant.[66] The Commissioner's position is that the cases cited by Mercury have noplace in the current depreciation context because it is governed by a specificstatutory regime that is different from those in the cases referred to, both in termsof jurisdiction and in terms of context.[67] When considering the meaning of "building" in her interpretation statement,the Commissioner addressed the type of cases relied on by Mercury and concludedthat structures that are specialised in the sense of the setting they provide or theirfunction or integration with plant or equipment are also buildings, effectively thequestion I am considering here. The Commissioner submits that becauseParliament was aware of her interpretation statement when it enacted the 2010Budget Act, and did not directly contradict it in the enacted definition of building,it must have been or should be taken to accept the Commissioner's interpretationas correct. I do not accept this submission. I consider it would go too far to inferan endorsement of the Commissioner's reasoning from the lack of a positivedefinition in the Act, or the provisions that were included.[68] Ms Casey stresses that the core concept in the depreciation regime is theEUL of the item, which is a question of fact. Depreciation rates are set to reflectthe EUL. Buildings with a life of 50 years or more are by law now allowed nodeduction. It is accepted that the turbine halls have an EUL of 50 years of more.The Commissioner submits that categorisation of them as buildings is thereforeentirely consistent with the depreciation regime.[69] Ms Casey also refers to the Court of Appeal's decision in QueenstownAirport Ltd v Commissioner of Inland Revenue which she advises me is the onlycase under the current depreciation regime.28 I agree it is material in terms ofprinciple.[70] The issue in Queenstown Airport Ltd v Commissioner of Inland Revenueconcerned whether a grassed area at the end of a runway, used as a safety area,could be classed as "runway" for depreciation purposes.[71] The Court said the policy underlying the current depreciation rules in theAct is to allow for deduction of the cost of depreciation, and that the purpose of thedepreciation regime is to recognise the fact that assets wear out and must eventuallybe replaced and to allow the capital cost of the asset to be written-off progressivelyover its life where it is a business asset.29[72] Ms Casey submits that the corollary, put simply, is that if a taxpayer assertsthat something is an item that has a depreciation rate which is greatly inconsistentwith its actual EUL, then that is a clear signal that the taxpayer's interpretation isinconsistent with the purpose of the depreciation regime. That must be correct.[73] I note further that particular care needs to be taken around the integration ofplant into something that otherwise appears to be a building. The House of Lordsconfirmed in Inland Revenue Commissioners v Scottish Newcastle Breweries Ltd,following the line of cases initiated in Yarmouth v France, that items that mightotherwise be plant but are integrated into the fabric of the building (such as28 Queenstown Airport Corporation Ltd v Commissioner of Inland Revenue [2017] NZCA 20,[2017] 2 NZLR 811.29 At [45].electrical wiring) are generally not to be considered plant.30 The Court furtherconfirms that exceptions to that principle are rare:31Moreover the test accepted in this case by the commissioners and affirmedby the Inner House draws a line which can be held without trouble:something which becomes part of the premises, instead of merelyembellishing them, is not plant, except in the rare case where the premisesare themselves plant, like the dry dock in Barclay Curle.[74] That position is legislated for and extended in the fit-out provisions in theAct.32[75] While I do not agree with Ms Casey that the case law has no place in thiscontext, I do agree that the provisions in the legislation on what is not a building,and the policy underlying the regime, should lead to a cautious approach inapplying the principle in Waitaki.[76] However, I consider that in those rare situations where a building is part ofthe apparatus for carrying on a business, it might be considered for purposes of thedepreciation provisions of the Act to not be a building. Interestingly, that languageis similar to the language the Commissioner used in PROV 26 when she said ahydro turbine hall is "integral to the function of the production of hydropower".33[77] Mercury's evidence seems to have been closely modelled on an"integration" concept, perhaps borrowing from the language used in PROV 26.Mercury relies (particularly) on Mr Brookie's evidence, which is as follows:In my opinion and experience, all of the turbine halls' civil and plantsystems are fundamentally integrated with one another. The plant cannotexist, operate, be serviced or maintained without the civil systems. Theonly reason the civil systems exist is to support the operation, serviceand/or maintenance of the major and secondary plant in the turbine hall.The major plant – the turbine, generator and condenser – are the mostcrucial pieces of equipment required to generate electricity. The secondaryplant and the civil systems play a supporting, but no less essential rolebecause without them the power station would not function.30 Inland Revenue Commissioners v Scottish Newcastle Breweries Ltd [1982] 2 All ER 230 (HL)at 328 per Lord Lowry; and Yarmouth v France (1887) 19 QBD 647.31 At 332 per Lord Lowry.32 See the discussion at [37]–[47].33 A ruling such as PROV 26, though binding on the Commissioner, does not have other legaleffect.The functions and dimensions of the major plant drives the function anddimension of literally every other plant item, which in turn defines thefunction, the geometry and load-carrying requirements of the other system,including the civil systems.So, to my mind, the disputed civil systems in the turbine hall are very muchas core to the overall power station as the plant systems. That is really themain point I wish to make in my evidence. It is the key point which fallsout of what Mercury's solicitor have asked me to do.[78] Under cross-examination, Mr Brookie clarified the above passages to sayall the plant works together. He said what he means by "integration" is not that theturbine hall (or its "civil elements") and its plant are physically touching, but thatthey are interrelated and interconnected: one sits with the other comfortably and issupported by the other. He added that this is an industrial process and it all workstogether. He agreed this is typical of any industrial process and that he was nottrying to say anything more than that. He accepted that the plant and turbine hallwere physically distinct; that is if you took the plant out, the roof, walls andcladding of the turbine hall would remain.[79] I found Mr Brookie's evidence quite vague in terms of Mercury's "keypoint". My sense was that in his evidence-in-chief he was trying to stretch hisdescription as far as possible to fit the argument, without I might add being in anyway misleading – hence his ready agreement with Ms Casey's propositions.[80] I consider Mr Brookie's "key point" can be fairly summed up as being thatthe plant and the turbine hall sit with each other comfortably and are supported byeach other. On that basis, it all works together, as is typical of any industrialprocess.[81] However, I consider this falls well short of the position in Waitaki. Theturbine hall providing "support" for machinery is quite different to its being anintegral part of the production process to such a degree that it can be treated asplant.[82] The particulars on which Mr Brookie relies, not surprisingly given hisanswers in cross-examination, do not take the matter much further. I consider someof these particulars below.[83] Addressing Mercury's first two "civil elements" of the turbine hall,34Mr Brookie refers to the walls being reinforced to support the gantry crane and thefloor reinforced to support the equipment sitting on it. But this is not exactly outof the usual for industrial buildings. The gantry crane itself is used (postconstruction of the turbine hall) for maintenance, and is not part of the actualproduction process. The turbine hall serves a materially wider range of uses thansupporting the crane. I accept Dr Brooke's evidence that the crane rails andassociated corbels are the only components with the sole purpose of supporting thecrane and that the great majority of the steel work in the turbine hall serves multiplepurposes including resisting forces generated by the weight of the crane, the weightof the turbine hall, the wind acting on it and earthquakes. The reinforced floors areused for many and general purposes. The position with the four floors is materiallydifferent from the TG Foundation, which the Commissioner has assessed as "plant".[84] Addressing Mercury's third "civil element", there is nothing about thecladding (exterior walls and roof) of the building that is integral to the productionprocess. (In fact, Mercury advanced considerable evidence as to the cladding beingunnecessary. That line of reasoning was difficult to follow as the cladding forms amaterial part of the structure which has been built to Mercury's design requirementsand at considerable cost. That submission seems to have been dropped in closing.)[85] The need for the turbine hall to meet certain length, height and otherspecifications to house all the machinery does not go to the hall's being integral tothe production process, and again would be a not uncommon dictate for industrialbuildings.[86] As I have said, Mercury has not persuaded me that this is one of those rarecases where the structure (the turbine hall) is part of the apparatus of the business.[87] The other possible proposition, to be taken from cases such as BarclayCurle, is that where a structure has no other possible use, it is not, or may not be abuilding. I am not sure this is in fact part of the ratio of the House of Lords decisionin Barclay Curle, but it has been cited that way. I did not take Mercury to press this34 To use Mr Brookie's language, referring to the elements described above at [29].point as a separate argument, but the issue seemed to be raised quite frequentlyduring the hearing.35[88] On the basis that alternative use options can be an indicia of whethersomething is a building, the Commissioner put up evidence from Mr Geoghegan36of two out of three obsolete thermal powerstations (New Plymouth and Meremere)being repurposed. One is used as a dry-store. The other is apparently still used asan industrial-grade recycling plant. Mr Geoghegan said that there is similarity inconstruction between a thermal powerstation and the "flash" geothermal turbinehalls, so I infer that such alternative uses could be possible for the two turbine hallsinvolved here. In any event, I have no evidence to the contrary.Other considerations[89] Mercury places considerable emphasis on the depreciation treatment ofhydro powerhouses, covered in PROV 26. It submits there is no material distinctionbetween a hydro powerhouse and a geothermal powerhouse, and points tocomparisons with the Aratiatia hydro powerhouse. PROV 26 is not law such that Icould apply it. Further, I do not have the information I would need to draw ameaningful comparison between hydro powerhouses generally and geothermalpowerhouses generally, regardless of what reliance I could place on PROV 26.Mr Geoghegan gave evidence that there are 36 hydrostations in New Zealand andit is undisputed that Aratiatia is unusual in that it is not sited in a river.37[90] I would add that it strikes me there are likely some material differencesbetween hydro and geothermal powerhouses, including that most hydropowerhouses are situated in rivers and have water flowing through them, or part ofthem. They are attached to the dam itself. This would tend to suggest that thehydro powerhouse would fall into the limited category of structures that areintegrally involved in the production process, similar to the cool store and dry dockexamples.35 Mercury notes for example that the turbine halls would be very expensive to re-purpose,particularly given the surrounding plant, and that Mercury is required to remediate theproperties should electricity generation cease.36 An independent consultant with experience in the electricity generation industry.37 Mercury's Chief Financial Officer, Mr Meek, accepted this.[91] Finally, I note that the Commissioner places some emphasis on Mercury'streatment of its turbine hall at Rotokawa as a "building" for which 0% depreciationis claimed. The Commissioner says Mercury's tax treatment is inconsistent givenDr Brooke's evidence that the three turbine halls (Kawerau, NAP and Rotokawa)have the same material structural features. Mr Meek said that Rotokawa is differentto Kawerau and NAP because the turbine hall is smaller, and there is a much lowerlevel of complexity and integration between the plant elements and the cranestructure at the Rotokawa site. However, I agree with the Commissioner that thisevidence cannot be given any weight as Mr Meek does not have the appropriateexpertise. I agree that on the face of the evidence Mercury's tax treatment of thethree turbine halls would appear to be inconsistent. However, as I advisedMs Casey, I am not prepared to put any weight on this point.Conclusion[92] The turbine halls are buildings in the ordinary sense of the word, andWaitaki can be distinguished. This is not one of those relatively rare cases where astructure is part of the apparatus for carrying on a business, or so integral to theproduction process itself, that it should properly be classified as "plant".[93] Therefore, I find that the turbine halls at the Kawerau and NAP geothermalpowerstations (excluding any annex and the TG Foundation) are "buildings" forpurposes of the depreciation provisions of the Act.[94] Given my finding, it follows that I do not agree that the turbine hall can beclassified as a gantry crane for depreciation purposes.[95] I reserve leave for the parties to return to the Court should that be necessary.[96] Costs are also reserved. I expect parties such as Mercury and theCommissioner will be able to resolve costs themselves. If not, the Commissionershould file a memorandum within 21 days and Mercury seven days afterwards.------------------------------------------------------Hinton J