NRS MEDIA HOLDINGS LTD v COMMISSIONER OF INLAND REVENUE [2018] NZCA 472

NRS MEDIA HOLDINGS LTD v COMMISSIONER OF INLAND REVENUE [2018] NZCA 472 [1 November2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA728/2017[2018] NZCA 472BETWEEN NRS MEDIA HOLDINGS LIMITEDAppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 12 June 2018 (further submissions received 6 July 2018)Court: Brown, Clifford and Williams JJCounsel: G J Harley and R L Goss for AppellantH W Ebersohn and J B Y Y Cheng for RespondentJudgment: 1 November 2018 at 3.30 pmJUDGMENT OF THE COURTA The appeal is allowed.B The appellant is entitled to deductions totalling $1,706,568.23 and$1,963,472.31 in the 2011 and 2012 years respectively.C The respondent must pay the appellant costs for a standard appeal on aband A basis and usual disbursements.D Any order for costs in the High Court is quashed. Costs in the High Courtare to be determined by that Court in accordance with this judgment.____________________________________________________________________REASONS OF THE COURT(Given by Clifford J)Introduction[1] In its tax returns for the 2011 and 2012 years, NRS Media Holdings Ltd (NRS)claimed deductions for expenditure it said it had incurred in deriving exempt foreigndividends. The Commissioner of Inland Revenue (the Commissioner) disallowedthose deductions. She said the expenditure in question did not have the necessarynexus with those dividends. NRS took challenge proceedings in the High Court, whereClark J upheld the Commissioner's determination.1 NRS now appeals.Statutory context: issues[2] NRS claimed its deductions in reliance on s DB 55 of the Income Tax Act 2007(the 2007 ITA) which, at the time, provided:DB 55 Expenditure incurred in deriving exempt dividendDeduction(1) A company that derives a dividend that is exempt income of thecompany under section CW 9 (Dividend derived from foreigncompany) is allowed a deduction of the amount of the expenditureincurred by the company in deriving the dividend.Link with subpart DA(3) This section overrides the exempt income limitation. The generalpermission must still be satisfied and the other general limitations stillapply.[3] The Commissioner based her decision, that NRS' expenditure did not have asufficient relationship to the dividends paid to it by its subsidiaries, on the words usedin s DB 55(1) compared to the words used in s DA 1 (the general permission for thededuction of expenditure). That section reads:DA 1 General permissionNexus with income(1) A person is allowed a deduction for an amount of expenditure or loss,including an amount of depreciation loss, to the extent to which theexpenditure or loss is—(a) incurred by them in deriving—1 NRS Media Holdings Ltd v Commissioner of Inland Revenue [2017] NZHC 2978.(i) their assessable income; or(ii) their excluded income; or(iii) a combination of their assessable income and excludedincome; or(b) incurred by them in the course of carrying on a business for thepurpose of deriving—(i) their assessable income; or(ii) their excluded income; or(iii) a combination of their assessable income and excludedincome.General permission(2) Subsection (1) is called the general permission.[4] The Commissioner reasoned that the words "in deriving" found in s DA 1(1)(a)describes a closer nexus between the relevant expenditure and the income derived thando the words "in the course of carrying on a business for the purpose of deriving"found in s DA 1(1)(b). The same "closer" nexus was therefore required unders DB 55(1) given the use in that section of the same phrase "in deriving".[5] NRS says there is no real distinction between the nexus with income describedin the two subsections. Certainly, any difference is not sufficient to interpret s DB 55in the way the Commissioner did. The Commissioner and NRS both say theinterpretation they argue for is supported by legislative history.[6] The Commissioner also based her conclusion on the proposition that theexpenses for which NRS sought deductions were of a capital nature: therefore, anydeductions were necessarily prohibited by the capital limitation found in s DA 2(1) ofthe 2007 ITA (which is not overridden by s DB 55). The High Court did not need toconsider that argument, because it upheld the Commissioner's interpretation ofs DB 55. On appeal, the Commissioner supports the High Court's decision on thealternate basis of the applicability of the capital limitation.[7] We first consider whether the High Court was correct in upholdingthe Commissioner's categorisation of the nexus required between expenditure andincome for deductibility under s DB 55. We then consider the Commissioner'salternative argument about the applicability of the capital limitation.The facts[8] NRS was the sole or majority shareholder of a number of subsidiaries(the subsidiaries). Two were incorporated in the United Kingdom, one wasincorporated in Australia, and another was incorporated in Canada. Those subsidiariesderived income by facilitating the purchase of media time by their client advertisers.Central to that business was software developed and licensed to them by a sistercompany of NRS, Persuaders Concepts (NZ) Ltd (Persuaders). For its part as parentcompany, NRS set the strategic plan for its group as a whole, and for each of itssubsidiaries.2 In turn, it approved and monitored the business plans and the businessactivities of its subsidiaries as they operated within those strategic plans. It was inundertaking those activities that NRS incurred the expenses in question.[9] NRS categorised those expenses as comprising "payroll and consultants","marketing and travel", "rent and occupancy", and "overheads". They totalled$1,706,568.23 in the 2011 year, and $1,963,472.31 in the 2012 year. In those years,NRS derived exempt foreign dividend income of $1,989,357.00 and $1,892,295.00respectively.[10] NRS described the overall objective of its activities as being:(a) to maximise the financial return to the shareholders of NRS throughincreased dividends from the NRS subsidiaries, for the benefit of NRS;and(b) to enable NRS and its Board to discharge their obligations asparent company, from a legal governance perspective.2 As we return to, NRS maintains that it did not manage the subsidiaries.[11] The NRS subsidiaries were self-sufficient, with their own accounting, sales andmanagement teams, and did not require support or services to be provided by NRS tooperate on a day-to-day basis.The correct interpretation of s DB 55Judgment under appeal[12] The High Court first concluded, as had the Commissioner's adjudicationreport, that for the claimed expenditure to be deductible under s DB 55, NRS neededto show that expenditure was:3(a) directly linked to its exempt foreign dividend income in a positive way;(b) factually and causally directed to the production of the dividendincome; and(c) incurred in the course of producing the dividend income.[13] That conclusion was influenced by the following observations ofthe Taxation Review Committee in recommending the amendment that introduced thetwo limbs of s 111 of the Land and Income Tax Act 1954 (now s DA 1 of the 2007ITA) in October 1967:4The suggested new wording of the section introduces two standards by whichthe deductibility of an expenditure or loss would be tested. The first is ageneral standard which could apply to any item of expense or loss "incurredin gaining or producing the assessable income" and to all taxpayers whetherin business or employment. The second is applicable only to expense or loss"necessarily incurred in carrying on a business for the purpose of gaining orproducing such (assessable) income". The latter test is not [as] restrictive asthe first one as the expenditure or loss would not have to be directly related tothe income derived from the business. It would be sufficient if it were anecessary expense or loss in the carrying on of the business.[14] The explanation "the latter test is not [as] restrictive as the first one as theexpenditure or loss would not have to be directly related to the income derived from3 NRS Media Holdings Ltd v Commissioner of Inland Revenue, above n 1, at [10] and [33].4 Taxation in New Zealand — Report of the Taxation Review Committee (Taxation ReviewCommittee, October 1967) at [478].the business" was — as we understood the argument — the basis for the requirementof direct linkage.[15] Referring to Europa Oil (NZ) Ltd v Commissioner of Inland Revenue5 andThornton Estates Ltd v Commissioner of Inland Revenue6 the Judge reasoned:7[32] It is plain that the authorities recognise a distinction between the firstand second limbs of the General Permission. Given the materially similarterms of s DB 55(1) to the first limb of the General Permission there is no basisfor placing a different construction on each. Contrary to NRS' submission, thesimilarity between the provisions does not mean the same interpretativeapproach applies to the General Permission as a whole. That is becauses DB 55 does not contain any equivalent of the second limb of theGeneral Permission.[33] Section DA 1(1)(b), the second limb of the General Permission, allowsdeductions for expenditure incurred in the course of carrying on a business forthe purpose of deriving an income. The deductions allowed under s DB 55 areavailable only in respect of those expenses incurred in deriving dividends. Itfollows that even if expenditure is incurred "in the course of carrying on abusiness" for the purpose of deriving a dividend (second limb), theexpenditure will not be deductible unless the taxpayer establishes theexpenditure was incurred in the actual course of deriving the dividend (firstlimb).[16] That meant, the Judge said, that NRS must establish its expenditure wasfactually and causally directed at deriving a foreign dividend.8[17] The expenditure giving rise to the deductions claimed by NRS had not met thattest. It was:9 insufficiently related to the derivation of foreign dividends. The derivationof foreign dividends was one step removed from the purpose of theexpenditure, which was to increase the value of the subsidiaries. [18] The Judge summarised the evidence of Mr Gold, a director andmajority shareholder of NRS, as being that NRS' expenditure provided services to thesubsidiaries to "maximise the value" and "profitability" of each subsidiary.10 Thefactual and causal effect of that expenditure "was to improve the value and profitability5 Europa Oil (NZ) Ltd v Commissioner of Inland Revenue [1974] 2 NZLR 737 (CA).6 Thornton Estates Ltd v Commissioner of Inland Revenue (1995) 17 NZTC 12,230 (HC).7 NRS Media Holdings Ltd v Commissioner of Inland Revenue, above n 1.8 At [33].9 At [46].10 At [47].of the subsidiaries."11 That was the first consequence of NRS' expenditure. A furtherpossible consequence was receipt of dividends. As she put it:[50] I accept the purpose of NRS was "stewardship" of its investorsdirected at an increasing dividend stream derived from the share capitalinvested in the subsidiaries. But the purpose of the expenditure is irrelevantto the question whether expenditure is incurred in deriving the dividend.[12]Deriving dividends was an ancillary consequence of the increasingprofitability and value of the subsidiaries. Expenditure on maximising valueand profitability of the [company's] returning dividends is not deductibleunder s DB 55. Such expenditure may fall within the broader category ofexpenditure incurred "in the course of carrying on a business for the purposeof deriving income" (the second limb of the General Provision) but it does notfall within the more restricted scope of s DB 55.[19] For NRS, Mr Harley submitted that distinction was neither called for by thewords of the legislation nor supported by case law. Mr Harley based that submissionon a number of cases, including Commissioner of Inland Revenue v Banks13 andBuckley & Young Ltd v Commissioner of Inland Revenue.14The cases[20] Both the requisite nexus for deductibility and the relationship between the firstand second limbs have been discussed in a number of cases. Given the parties' relianceupon these cases, it is necessary to discuss these in some detail.[21] In Banks this Court considered the deductibility of home office expenses.At the time, s 111 of the Land and Income Tax Act provided the general authority fordeductions in calculating assessable income. It read:Expenditure or loss incurred in production of assessable incomeIn calculating the assessable income of any taxpayer, any expenditure or lossto the extent to which it—(a) Is incurred in gaining or producing the assessable income for anyincome year; or11 At [48].12 In this appeal, the Commissioner accepted the Judge erred in saying the purpose of the expenditurewas irrelevant. As we discuss from [24] onwards, purpose can be relevant, and even determinative,in deciding whether the required nexus for deductibility exists between expenditure and derivedincome.13 Commissioner of Inland Revenue v Banks [1978] 2 NZLR 472 (CA).14 Buckley & Young Ltd v Commissioner of Inland Revenue [1978] 2 NZLR 485 (CA).(b) Is necessarily incurred in carrying on a business for the purpose ofgaining or producing the assessable income for any income year—may, except as otherwise provided in this Act, be deducted from the totalincome derived by the taxpayer in the income year in which the expenditureor loss is incurred.[22] As can be seen, whereas s DA 1(1)(a) now uses the words "incurred by themin deriving their assessable income" s 111(a) used the words "as incurred in gaining orproducing the assessable income". It was not suggested to us that there was anymaterial difference between those wordings.[23] Richardson J reasoned that there were two features of s 111, and its place in thescheme of the deduction provisions, of particular importance. It is the first of thosethat is relevant here. That is, "the expenditure must meet the statutory standards inrelation to the assessable income of the taxpayer claiming the deduction".15The deduction was "available only where expenditure [had] the necessary relationship,both with the taxpayer concerned and the gaining or producing of his assessableincome".16 A relationship with the taxpayer was not, in itself, sufficient, as theprohibition of a deduction for capital expenditure (s 112(1)(a)) and private anddomestic expenditure (s 112(1)(i)) made clear. There must be the statutory nexusbetween the particular expenditure and the assessable income of the taxpayer claimingthe deduction.17 It is with the proper categorisation of that "statutory nexus" that weare concerned.[24] Speaking generally Richardson J said:18The language of s 111 is deceptively simple. The width and generality of thestatutory language has posed problems for Courts and tribunals faced withapplying the provisions in a practical way. There has been an understandableunwillingness in the cases to attempt to establish hard and fast rules to coverall situations in an area of the law which, so far as possible, should reflectcommercial realities. There are constant reminders in the judgments that eachcase of this kind depends on its own facts and the dividing line betweendeductibility and non-deductibility is blurred. It will often be helpful, indetermining and applying the statutory criteria, to consider the analysis andexposition of the statutory provisions in the decisions of the Courts and review15 Commissioner of Inland Revenue v Banks, above n 13, at 476.16 At 476. The second feature, not relevant here, was the contemplation in the statutory language ofapportionment.17 At 476.18 At 477.tribunals and the considerations regarded as particularly significant inindividual cases. However, this is not an area of the law where it is possibleto devise a judicial formula which, as a substitute for the statutory language,could be applied in all cases and, in the end, a decision in a particular casemust be reached on the application of the statutory language to its particularcircumstances. The focus of the inquiry necessarily shifts, depending on thecircumstances of the particular case.[25] Richardson J went on to state that it did not advance the argument in the casebefore the Court to emphasise the character of the expenditure for which deduction issought.19 It all depended, the Judge reasoned, on the relationship between theparticular premises or asset in respect of which the payment was made and the incomeearning process.20 So, further analysis of the relationship between expenditure andincome earning activities was required.21[26] In an important passage of the judgment, Richardson J referred to relevantAustralian authorities in the following terms:22In the Australian cases under the counterpart of s 111(1) there has beenconsiderable stress on the character of an outgoing in the sense of its beingincidental and relevant to the gaining or producing of the assessable income.Statements to that effect emphasise the relationship that must exist betweenthe advantage gained or sought to be gained by the expenditure and the incomeearning process. They do not, and cannot, specify in concrete terms the kindand degree of connection between the expenditure and the gaining orproducing of assessable income required in individual cases for theexpenditure to qualify for deduction. As was observed in Lunney v FederalCommissioner of Taxation:"Examination of these cases, however, readily shows that theexpression 'incidental and relevant' was not used in an attempt toformulate an exclusive and exhaustive test for ascertaining the extentof the operation of the section; the words were merely used in statingan attribute without which an item of expenditure cannot be regardedas deductible under the section."Putting it positively, Dixon J said in Amalgamated Zinc (de Bavay's) Ltd vFederal Commissioner of Taxation and we respectfully agree:"The expression 'in gaining or producing' has the force of 'in thecourse of gaining or producing' and looks rather to the scope of theoperations or activities and the relevance thereto of the expenditurethan to purpose in itself."19 At 477.20 At 477.21 At 477.22 At 478 (citations omitted).As is clear, Richardson J was endorsing the Australian approach.[27] In our view, two further passages from the judgment in Banks capture well theapproach mandated:23It then becomes a matter of degree, and so a question of fact, to determinewhether there is a sufficient relationship between the expenditure and what itprovided, or sought to provide, on the one hand, and the income earningprocess, on the other, to fall within the words of the section.As we see it, the essential question for consideration in this respect is whetherpart of the premises — whether set up as a workshop or surgery or study(cf Caffrey v Federal Commissioner of Taxation), or whether simply used forincome related activities — has a sufficient connection with the taxpayer'sincome earning process to justify the conclusion that expenditure referable tothat part of the premises is incurred in the course of gaining or producing theassessable income.[28] Richardson J took a similar approach in Banks when considering the taxpayer'sclaim for interest deductibility under s 112(1)(g), which permitted a deduction forinterest "payable on capital employed in the production of the assessable income".He said:24Having regard, too, to the statutory language "in the production of theassessable income" in s 112(1)(g) and "in the gaining or producing of theassessable income" in s 111(a), an inquiry under the former provision willordinarily involve essentially the same considerations in determining whetheror not there is a sufficient connection between the expenditure of interest andthe income earning activities involving the use of the property, for the interestto qualify for deduction.Sections 111 and 112 were considered again in 1978, by Richardson J in Buckley &Young Ltd v Commissioner of Inland Revenue.25 The case involved payments madeby a company to a senior employee after an acrimonious retirement. As relevant, thecompany made annual payments of $6,000 on account of the employee's covenant inrestraint of trade, contributed to his superannuation scheme, provided him with a carand met his legal expenses. The issue for this Court was whether those payments were,for the company involved, of a capital or revenue nature. Nexus was not the issue.23 At 478 and 482 (citations omitted and emphasis added).24 At 483 (emphasis added).25 Buckley & Young Ltd v Commissioner of Inland Revenue, above n 14.But, in describing the legislative scheme Richardson J again identified the features ofnexus and apportionment found in s 111 as being of particular importance. Relevantly,he described the nexus in the following terms:26The first is that a deduction is available only where the expenditure has thenecessary relationship both with the taxpayer concerned and with the gainingor producing of an assessable income or with the carrying on of a business forthat purpose. The heart of the inquiry is the identification of the relationshipbetween the advantage gained or sought to be gained by the expenditure andthe income earning process. That in turn requires determining the truecharacter of the payment. It then becomes a matter of degree and so a questionof fact to determine whether there is a sufficient relationship between theexpenditure and what it provided or sought to provide on the one hand, andthe income earning process on the other, to fall within the words of the section(Commissioner of Inland Revenue v Banks).[29] It is of some significance, in our view, that Richardson J speaks inthe alternative of "the gaining or producing of his assessable income" and "with thecarrying of a business for that purpose" without distinction as regards nexus. It wouldappear the Judge saw no reason to distinguish between the approach called for on thatissue as regards the two provisions.[30] As can been seen, thus far there is little if any support for the approachthe Commissioner took to deductibility, as summarised at [12] above. There is simplyno reflection, in the authorities, of the concepts of "directly linked in a positive way"and "factually and causally directed". Nor is it suggested that there is any greatdistinction between the tests for nexus under either of subs (1)(a) or (b) of s DA 1.Rather, what is required is the application of the statutory language — here "theamount of the expenditure incurred by the company in deriving the dividend" — tothe particular circumstances.[31] In his oral submissions, Mr Harley drew our attention to like approaches to therequired nexus for deductibility found in a number of earlier decisions. Reference toone of those will suffice to support the general conclusion we have just reached.[32] In Ronpibon Tin No Liability v Federal Commissioner of Taxationthe High Court of Australia commented on the phrase "incurred in gaining or26 At 487 (emphasis added and citations omitted).producing the assessable income" as it then appeared in both limbs of s 51(1) of theIncome Tax Assessment Act 1936 (Cth) in the following way:27For expenditure to form an allowable deduction as an outgoing incurred ingaining or producing the assessable income it must be incidental and relevantto that end. The words "incurred in gaining or producing the assessableincome" mean in the course of gaining or producing such income. Theiroperation has been explained in cases decided under the provisions of theprevious enactments: see particularly Amalgamated Zinc (de Bavay's) Ltd vFederal Commissioner of Taxation and W Nevill & Co Ltd v FederalCommissioner of Taxation.Notwithstanding the differences in other respects in the present provision, theexpression "incurred in gaining or producing the assessable income" has beenleft unchanged and bears the same meaning. In brief substance, to come withinthe initial part of the sub-section it is both sufficient and necessary that theoccasion of the loss or outgoing should be found in whatever is productive ofthe assessable income or, if none be produced, would be expected to produceassessable income.[33] In our view, the phrase "whatever is productive of the assessable income" is ahelpful way both of characterising the factual inquiry that the application of thestatutory language requires and of describing the nexus that is the focus of that inquiry.[34] In our view, Europa Oil (NZ) Ltd and Thornton Estates Ltd do not providesupport for the Commissioner's stance.[35] As reported, Europa Oil (NZ) Ltd contains this Court's discussion of the thenrecently enacted s 111 of the Land and Income Tax Act. It would appear that the factualissue related to the availability of deductions for the cost of stock-in-trade. The reportprovides little detail beyond that. The new s 111 governed three of the tax yearsinvolved. Each of the Judges wrestled with the difference between the old and thenew. McCarthy P wrote:28The reasons for the changes are by no means certain. McMullin J [the HighCourt Judge] has pointed to some, and it has also been suggested that onespecial purpose of limb (b) may have been to include expenditure such wasthe subject of the Privy Council's judgment in Ward & Co Ltd v Commissionerof Taxes, which, though it may have been incurred for the purpose of protectingor advancing the taxpayer's business, cannot be shown to have been expendedin producing assessable income. I think this may well be so, but I do not feel27 Ronpibon Tin No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56–57(citations omitted).28 Europa Oil (NZ) Ltd v Commissioner of Inland Revenue, above n 5, at 739 (citations omitted).sufficiently convinced of any explanation other than the new section wasintended to relieve taxpayers somewhat from the rigorous test which the courtshad found it necessary to impose because of the earlier wording.[36] Richardson J acknowledged that the language of the new s 111(b) would likely"widen the field of deductibility", at least for taxpayers who were "carrying on abusiness".29 Other than comparing the wording of the two sections he proffered littlefurther explanation.[37] Beattie J also saw the amendment as having an expansionary purpose.He wrote:30I consider that the new section enlarges the scope of deductible expenditure.As I shall later discuss, under s 111(a) there is no qualifying adverb and unders 111(b) the qualification has changed.[38] But, again, beyond that Beattie J also offered no further explanation.[39] As can be seen, the comments in Europa Oil (NZ) Ltd reflect the generalproposition that the second limb of s 111 may not be as restrictive as the first. Beyondthat, they do not materially assist. In our view, the case does not support the nexuscharacterisation adopted by the Commissioner and the High Court.[40] Nor does Thornton Estates Ltd add much, if anything, to that analysis.The case concerned the accrual rules, and the timing of the availability of deductionsfor the cost of land and its subsequent development. That the relevant expenses weredeductible was not challenged by the Commissioner: the question was timing. In thecourse of extended submissions, and having correctly summarised the generalprinciples found in Banks and Buckley & Young Ltd, the taxpayer's lawyer paraphrasedthe nexus requirement under s 104(a) of the Income Tax Act 1976 (the 1976 ITA) bythe phrase "factually and causally relevant to the production of the taxpayers'assessable income". The Judge noted:31The Commissioner did not make any submissions in relation to s 104, and itseems to me those made by Mr Martin are correct. 29 At 740.30 At 741.31 Thornton Estates Ltd v Commissioner of Inland Revenue, above n 6, at 12,235.[41] To the extent the Commissioner's phrase "factually and causally directed"appears to come from Thornton Estates Ltd, we did not find the case to be of any greatauthority, nor the phrase itself to be relevant or helpful.Legislative history[42] We now turn to the legislative history of s DB 55 because, as noted, boththe Commissioner and NRS say the interpretation they argue for is supported by thelegislative history. Notwithstanding the helpful submissions we received, both inwriting and orally, by the end of the hearing the position on that matter was not as clearas we might have wished. We therefore requested a joint memorandum from counselsetting out, hopefully on an agreed basis, s DB 55's legislative history and its role overtime.[43] The memorandum we subsequently received was, as requested, agreed albeitwith one exception. That exception was of some significance: the parties were unableto agree on the reason for the enactment of s DB 55. That has not helped our task.Moreover, the material is dense and now historical.[44] We also note that in her submissions the Commissioner relied in particular oncorrespondence from an individual taxpayer to the Select Committee as evidencing thetype of expenditure Parliament had in mind when enacting s DB 55. We think thatexpands the net of legitimate interpretational material at least a step too far. Whatevermay or may not have been the motivation of an individual taxpayer, or group oftaxpayers, in seeking a particular amendment to the legislation does not, in our view,constitute relevant interpretational material, beyond the extent to which that materialbecomes part of the official Parliamentary record.[45] Subject to those reservations, we now set out our understanding of thelegislative history of s DB 55. At the end of the day, and taken overall, our sense isthat the deductions NRS claimed may not have been at the forefront of Parliament's,or the Commissioner's, minds when the section was introduced. That, of itself, is notdeterminative of the issues here.[46] Section DB 55 was originally introduced in 2004 as s DJ 11B ofthe Income Tax Act 1994. It was retrospectively repealed on 30 June 2014 by s 49(2)of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act2014 (the 2014 Act). The repeal was effective as of 30 June 2009. However, the 2014Act contained a savings provision: provided certain criteria were met, the repeal didnot apply to tax returns filed before 22 November 2013, the date the Bill wasintroduced to Parliament. It is not disputed that NRS' challenged returns fall withinthat savings provision.[47] Section DB 55 did an apparently curious thing. It allowed a deduction forexpenses incurred in deriving exempt income. That is, s CW 9(1) of the 2007 ITAprovides:A dividend from a foreign company is exempt income if derived by a companythat is resident in New Zealand.[48] Such an allowance is contrary to the scheme of the 2007 ITA. Section DA 2(3)provides:(3) A person is denied a deduction for an amount of expenditure or loss tothe extent to which it is incurred in deriving exempt income. This ruleis called the exempt income limitation.[49] Section DB 55 had its origins in New Zealand's international tax regime. Thattax regime, designed to protect New Zealand's tax base and remove distortingincentives for off-shore investment, was introduced by the Income Tax AmendmentAct 1988 (No 5). Three regimes for taxing foreign-sourced income were established:(a) the CFC regime;(b) the foreign investment fund (FIF) regime; and(c) the foreign dividend withholding payment (FDWP) regime.[50] The CFC regime was necessary to ensure that foreign-sourced income wastaxed effectively. Before the CFC regime, New Zealand residents could avoid tax byaccumulating income in companies resident offshore, but effectively controlled fromNew Zealand. The CFC regime now applies to all taxpayers who have an "incomeinterest" of greater than 10 per cent in a foreign company that is effectively controlledby a New Zealand shareholder or group.32 The threshold for effective control isgenerally 50 per cent. Thus, each of NRS' subsidiaries was a CFC.[51] When introduced, the CFC regime provided for full attribution of a CFC'sincome to the New Zealand controlling shareholder — unless the CFC was resident ina grey list country (Australia, Canada, France, Germany, Japan, the United Kingdomand the United States). Given the incorporation of NRS' subsidiaries inthe United Kingdom, Canada and Australia, NRS was not required to attribute theirincome.[52] FDWP applied to dividends received by a New Zealand company from foreigncompanies, subject to a credit in the case of dividends from grey list companies. Thatcredit worked on the basis that, for dividends from grey list countries, the foreigncompany would be presumed to have paid foreign tax equal to the New Zealandincome tax payable. So, in effect, there would be no withholding payment to pay.Thus, just as NRS was not required to attribute its subsidiaries' income, neither was itrequired to pay FDWP on dividends actually received from those subsidiaries.[53] That was not the case for all corporate taxpayers, including investment vehicleslike unit trusts, for whom dividends from foreign companies were exempt income butnonetheless subject to FDWP. Notwithstanding the effective tax of the FDWP,s DA 2(3) precluded deductions for expenses incurred in deriving that exempt income.That mismatch was, counsel advised, addressed by taxpayers structuring suchdividends as bonus issues. As we understand it, in that way liability to pay FDWP didnot arise. In 2003, however, changes were proposed which would treat such bonusissues as dividends and therefore as exempt income. So, the mismatch — the objectivesignificance of which was not explained to us — would exist again. In response,s DJ 11B was introduced "to allow a deduction for expenditure incurred by a companyderiving dividends that are exempt under section CB 10(1) ".3332 Income Tax Act, s CQ2 and subpt EX.33 Taxation (Annual Rates, Venture Capital and Miscellaneous Provisions) Bill 2004 (110-2)(select committee report) at 19.[54] New Zealand's international tax regime was changed again in 2009.The introduction of the active/passive distinction and its application in the attributionof CFC income resulted in the abolition of FDWP. Our understanding is that NRS'grey list subsidiaries were not affected by that repeal, as FDWP had not applied tothem. How the CFC provisions applied going forward to NRS and its subsidiaries,however, was not explained. What was agreed was that "no deductions [were] allowedto the shareholder in relation to [the] active income" of a CFC.[55] What is reasonably clear is that with those changes in 2009 the rationale fors DB 55 no longer existed. That is, the abolition of FDWP, and the nexus fordeductibility provided by the attribution of CFC income, eliminated the mismatch thatthe section had been intended to address. That fact was, however, overlooked, as wassubsequently explained in the Officials' Report to the Finance and Expenditure SelectCommittee considering the Taxation (Annual Rates, Employee Allowances, andRemedial Matters) Bill 2014, which proposed the repeal of s DB 55:34When a New Zealand company receives a dividend from a foreign company,the dividend is exempt from income tax. Section DB 55 allows deductionsdespite the fact that the dividends are exempt from income tax.The rationale for this, is that before 2009, the dividends were subject to aspecial levy, known as "foreign dividend payment" or [FDWP] which wasequivalent to income tax.In 2009 there was a major reform of New Zealand's international tax rules.This reform was designed to reduce tax barriers on New Zealand businessesthat expand offshore. It did this by exempting most types of income thatbusinesses earned through foreign subsidiaries. As part of this reform all taxon foreign dividends paid to New Zealand companies, including [FDWP] wasremoved.In the course of implementing the 2009 reforms, the need to repeal sectionDB 55 was overlooked. We are now seeking to repeal it as part of the currentbill.Maintaining section DB 55 in the absence of [FDWP] would be contrary togeneral tax principles of not allowing deductions which relate to exemptincome (now that the dividends are truly exempt). It would effectively be atax concession or subsidy.34 Inland Revenue Taxation (Annual Rates, Employee Allowances, and Remedial Matters) BillOfficials' Report to the Finance and Expenditure Committee on Submissions on the Bill(March 2014) at 256.[56] Thus, and as that Report makes clear, in claiming deductions for expensesincurred in deriving exempt dividend income, NRS was the unintended beneficiary ofa legislative oversight. In our view, however, that does not advancethe Commissioner's argument.[57] We therefore conclude that here the legislative history does not supportthe Commissioner's interpretation of s DB 55. Rather, taking account of the plainwords of the section, the statutory context and the recorded legislative intent, we thinkthe ambit of the deductibility provided by s DB 55 is to be decided in accordance withthe general principles that we have already explained.Nexus[58] The question then becomes whether the nexus between NRS' expenditure andthe deriving of the exempt dividend income has the necessary characteristics to supportdeductibility.[59] As a holding company, NRS' business was, as its witnesses described, topromote the interests of its shareholder investors by maximising the value of theirinvestment. That is basic company law. At the same time, there can be little doubtthat the activities NRS engaged in for that overall purpose bore the necessary nexuswith the deriving of the dividends paid to it by its subsidiaries.[60] Mr Gold's evidence summarises the position well:103 [NRS] was the group company shareholder, and its functions were asdescribed above, reflecting the four major cost types. Those costs andfunctions were directed at building and managing the respectivebusinesses of the foreign companies, to make them profitable. [NRS]was not itself running those foreign companies — each had their ownhighly skilled and competent management teams, to run theirbusinesses (CEO, CFO, marketing and sales functions andadministration). [NRS'] costs were incurred in respect of the functionof providing group stewardship including financial control, leadershipand development. It would never have derived the dividends withoutthese functions, and the costs incurred in providing them.104 [NRS] was not a passive investor of its share capital. Quite thereverse. The Corporate Office team were totally active in every sense,in driving the highest possible dividend returns, from the ongoingstewardship of all the company's capital and intellectual property.105 In fact, the payment of Corporate Office costs was reliant on dividendstreams from the subsidiaries. From the practical perspective, it hadto incur the Corporate Office costs that are in issue here, in order toderive those dividends.[61] In our view, those comments illustrate why the necessary nexus did existbetween the expenditure and the exempt dividend income derived to make thatexpenditure deductible.Were NRS' expenses of a capital nature?[62] We therefore turn to the matter not addressed in the High Court: that is, thesignificance here of the capital limitation.[63] Section DA 2 of the 2007 ITA contains what are described as thegeneral limitations. These are overriding principles of non-deductibility. The first ofthose reads as follows:Capital limitation(1) A person is denied a deduction for an amount of expenditure or lossto the extent to which it is of a capital nature. This rule is called thecapital limitation.[64] As subs (3) of s DB 55 makes clear, in allowing deductions incurred in derivingexempt dividend income, the legislature did not override the capital limitation or theother general limitations. The subsection provides:Link with subpart DA.(3) This section overrides the exempt income limitation. The generalpermission must still be satisfied and the other general limitations stillapply.[65] So, notwithstanding our conclusion that the necessary nexus between theexpenses incurred and the exempt dividend income derived exists, if those expensesare properly categorised as being of a capital nature, then they will not be deductible.Submissions[66] The Commissioner's argument here is that the subsidiaries were capital assetsof NRS and therefore expenditure in respect of improving the value of such assets iscapital in nature. It did not matter, the Commissioner argued, that the expenditure wasrecurrent nor of a category that could, in other circumstances, be considered to be inrespect of revenue. Whether the expenditure is capital or revenue is determined by thenature of the asset acquired or improved by the expenditure. The Court of Appeal hascalled this the "identifiable asset test".35 The asset improved by the expenditure herewas, the Commissioner argued, NRS' subsidiaries. Those assets "were part of thebusiness structure of [NRS] that is held on capital account".[67] That was, NRS responded, a rerun of arguments designed to limit interestdeductibility unsuccessfully advanced in a series of decisions culminating in thisCourt's decision in Commissioner of Inland Revenue v Brierley.36 Those cases concernthe extent of the deductibility of interest provided for by s 106(1)(h) of the 1976 ITA.The question was whether deductibility could be declined to the extent that the capitalin respect of which the interest was being paid itself increased in value in anon-assessable way. Mr Harley pointed to the following extract from the decision ofRichardson J in Brierley in support of his argument:37The legislature must be taken to have well understood that capital employedin income earning activities may in the course of those activities change invalue and that the owner may derive capital returns in variety of forms. On anarrower view it might be said that such an asset is always employed in theproduction of both assessable income and prospective capital benefits.However it would be contrary to both past practice and to the principle thatincome is a flow reflecting the fruit of the tree to treat the existence of actualor prospective capital appreciation or actual or prospective capital returns asproviding a basis for the apportionment of interest expenses. It would also beinconsistent with the scheme of the legislation, and in particular the specificand limited provisions for clawback of interest, to refuse deduction for anassumed capital element of interest under s 106(1)(h).[68] By analogy, Mr Harley argued that the fact that NRS' activities might haveincreased the value of its subsidiaries did not disentitle NRS to the deduction allowedby s DB 55.[69] We can see that argument: but the distinction here is the Commissioner'sreliance on the general capital limitation. Given that Parliament explicitly retained the35 The Commissioner cited Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988]2 NZLR 736 (CA) in support.36 Commissioner of Inland Revenue v Brierley [1990] 3 NZLR 303 (CA); Pacific Rendezvous Ltd vCommissioner of Inland Revenue [1986] 2 NZLR 567 (CA); and Eggers v Commissioner of InlandRevenue [1988] 2 NZLR 365 (CA).37 At 310–311.general limitation on the deductibility of expenditure of a capital nature whenproviding for deductibility with respect to exempt dividend income, it clearly provideda different scheme from the one Mr Harley based his argument on.[70] It is therefore necessary to address this aspect of the Commissioner's argumentin terms of first principles and by considering NRS' expenditure from a practical andbusiness point of view.The law[71] The approach in New Zealand is now settled, as this Court's decision inEasy Park Ltd v Commissioner of Inland Revenue shows.38 The governing approachis summarised by the observations of Lord Pearce in BP Australia Ltd v Commissionerof Taxation of the Commonwealth of Australia, adopted by this Court in Commissionerof Inland Revenue v Thomas Borthwick & Sons (Australasia) Ltd:39The 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 guiding featureswhich must provide the ultimate answer. Although the categories of capitaland income expenditure are distinct and easily ascertainable in obvious casesthat lie far from the boundary, the line of distinction is often hard to draw inborderline cases; and conflicting considerations may produce a situation wherethe answer turns on questions of emphasis and degree. That answer:"depends on what the expenditure is calculated to effectfrom a practical and business point of view rather than uponthe juristic classification of the legal rights, if any, secured,employed or exhausted 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.38 Easy Park Ltd v Commissioner of Inland Revenue [2018] NZCA 296, (2018) 28 NZTC 23-066.39 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.[72] The courts have also identified a number of relevant, but not determinative,indicators. These include the "enduring benefit test",40 the "fixed or circulating capitaltest",41 and whether the expenditure was recurrent. Ultimately, however, the focusmust be on what the expenditure was calculated to effect from a practical and businesspoint of view.[73] With that in mind, it is necessary to briefly summarise the nature of NRS'business. As noted above, NRS is the parent company of subsidiaries incorporated inforeign jurisdictions. The subsidiaries provide and maintain systems that facilitatesales of radio and television advertising space by the subsidiaries' clients. Theintellectual property in the systems has, at all material times, been held by Persuaders.The High Court summarised:42The function of the Head Office was to manage NRS' share capital invested inthe subsidiaries. NRS managed the subsidiaries by establishing and managingstrategic and business plans; executing projects to increase profitability;reviewing financial performance; receiving reports from the subsidiaries;regularly visiting each subsidiary; and reporting to the Board on a monthlybasis.[74] NRS took issue with that synopsis on appeal — it claimed "each subsidiary hadits own independent Board of Directors, Chief Executive, Chief Financial Officer andoperating staff". This is reflected in Mr Gold's evidence, as set out above at [60].[75] The Commissioner relies on selected pieces of evidence to support herargument, including:(a) the agreement between NRS and Persuaders, which noted that thefunding of the head office was to ensure the "ongoing development andsuccessful management of the [group]";(b) Mr Gold's brief of evidence, which noted that oversight of thesubsidiaries included expansion into new markets, new product40 Commissioner of Inland Revenue v Trustpower Ltd [2015] NZCA 253, [2015] 3 NZLR 658 at [62].41 Commissioner of Inland Revenue v Inglis [1993] 2 NZLR 29 (CA).42 NRS Media Holdings Ltd v Commissioner of Inland Revenue, above n 1, at [6].development, and existing product improvement and businessdevelopment"; and(c) the expenditure included the establishment of business plans, makingof surplus profits that were not only paid out as dividends but reinvestedwithin the group, and the development and improvement of products.[76] In our view, however, that does not properly reflect the nature of NRS'business. NRS' business operations were, fundamentally, the oversight of itssubsidiaries. As Mr Gold explained at one point in his brief of evidence, the real valuein the media business operated by NRS and NRS' subsidiaries was in the intellectualproperty of their business systems. From a practical and business point of view, NRS'expenditure was calculated to simply facilitate the operations of the subsidiaries ratherthan to improve the capital of the subsidiaries. In this respect, the expenses for whichNRS claimed deductions represent recurrent and regular business expenses — payrolland consultants, marketing and travel, rent and occupancy, and overheads. These areall manifestly revenue expenses. In our view, NRS ought to be entitled to a deductionfor these expenses.Result[77] The appeal is allowed.[78] The appellant is entitled to deductions totalling $1,706,568.23 and$1,963,472.31 in the 2011 and 2012 years respectively.[79] The respondent must pay the appellant costs for a standard appeal on a band Abasis and usual disbursements.[80] Any order for costs in the High Court is quashed. Costs in the High Court areto be determined by that Court in accordance with this judgment.Solicitors:Chapman Tripp, Wellington for AppellantCrown Law Office, Wellington for Respondent