QUEENSTOWN AIRPORT CORPORATION LIMITED v COMMISSIONER OF INLAND REVENUE [2017] NZCA 20

QUEENSTOWN AIRPORT CORPORATION LIMITED v COMMISSIONER OF INLAND REVENUE [2017] NZCA 20 [22 February 2017]IN THE COURT OF APPEAL OF NEW ZEALANDCA324/2016[2017] NZCA 20BETWEEN QUEENSTOWN AIRPORTCORPORATION LIMITEDAppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 8 February 2017Court: Randerson, Miller and Asher JJCounsel: D J Goddard QC, A S Butler and B M Brown for AppellantP H Courtney and P D Marshall for RespondentJudgment: 22 February 2017 at 10:30 amJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements. We allow for second counsel.____________________________________________________________________REASONS OF THE COURT(Given by Randerson J)Table of ContentsPara NoIntroductionBackground factsThe relevant provisions of the Income Tax ActKey issuesThe approach in the High CourtThe arguments for the appellantOur approachDepreciation — legislative historyThe interpretation issue — analysisDepreciation policy"Airport runway"Conclusions on "airport runway"HardstandingWas the Judge correct to find that the eastern RESA was notproperty that, in normal circumstances, might reasonably beexpected to decline in value while it is being used or availablefor use in terms of s EE 6(1) of the ITA?Dr Emery's brief of evidenceResult[1][6][11][17][19][27][29][32][45][45][50][64][74][80][84][86]Introduction[1] The appellant is the owner and operator of the Queenstown Airport and has been in dispute with the respondent Commissioner over depreciation deductions for income tax purposes.[2] Specifically, changes to civil aviation rules adopted in New Zealand in 2006 required safety areas to be provided at each end of airport runways used for international flights. These areas, known as runway end safety areas (RESAs), are designed to provide a safety zone in the event of an incident during take-off or landing which results in an aircraft undershooting or overrunning the runway.[3] At the eastern end of Queenstown airport there is a steep 45-metre drop-off into the Shotover River. The appellant expended some $8.7 million in constructing the eastern RESA which required the formation of a very substantial supporting embankment. In the 2012 and 2013 income tax years the appellant sought to deductamounts for depreciation on the footing that the RESA was an "airport runway" interms of the Income Tax Act 2007 (the ITA), or alternatively that the deductions fordepreciation were permitted as "hardstanding" or as a "road".[4] The Commissioner declined to allow the deductions and the dispute was taken to the High Court. Brown J agreed with the Commissioner that the deductions were not permitted because the RESA did not fit within any of the descriptions relied upon by the appellant.1[5] On appeal, the appellant no longer argues that the RESA (including the embankment) is a road for the purposes of the ITA but submits the Judge was wrong to conclude it was not an airport runway or hardstanding. The issue is essentiallyone of interpretation, focusing principally on the term "runway" in the relevantlegislation.Background facts[6] In 1998 the International Civil Aviation Organisation set a new standard requiring the creation of a minimum 90-metre RESA at each end of airport runways used for international flights.2 This standard was adopted into New Zealand law in October 2006 by an amendment to r 139.51 of the Civil Aviation Rules.3 We refer to the relevant requirements of the Rules in more detail below. For present purposes, it is sufficient to note that the RESAs were required under the Civil Aviation Rules to extend to a distance of at least 90 metres from the end of the "runway strip" (adefined term to which we will revert). In the case of the Queenstown Airport, it is common ground that the RESAs must also have a minimum width of 90 metres. Although the construction of the required RESA at the western end of the airport runway strip was straightforward, there was a difficulty in complying with the Civil Aviation Rules at the eastern end.[7] The Judge cited the evidence of an aviation consultant, Mr Park, who explained the problem and the options available in these terms:6.2 At the eastern end there was a distance of approximately 32m from the end of the seal to the security fence at its closest point. Together1 Queenstown Airport Corporation Ltd v Commissioner of Inland Revenue [2016] NZHC 1299, (2016) 27 NZTC 22-054 [High Court judgment].2 The standard was implemented in November 1999 through the 3rd edition of Annex 14 to the Convention on International Civil Aviation [Chicago Convention] 1175 UNTS 126 (opened for signature 7 December 1944, entered into force 4 April 1947).3 Promulgated under the Civil Aviation Act 1990.with the 52m of seal this provided 84m clear area of which 12m was reserved for a proposed public road.6.3 This left 72m of which 60m is classed as runway strip end leaving 12m for RESA, a shortfall of 78m on the 90m required.6.4 This shortfall could only be addressed by either taking some of the existing runway as RESA, in which case it effectively would have reduced the runway length available for aircraft to take-off and land or extending eastwards over the embankment to provide theadditional RESA.[8] The appellant rejected the option of converting the last 78 metres of the sealed runway for the purposes of the eastern RESA. This would have resulted in a 78-metre reduction in the length of the paved runway and would also have had the unacceptable consequence that the airport could no longer be used for international flights. The ability to conduct international flights was described by the former chief executive of the appellant company, Mr Read, as pivotal to Queenstown tourism and national economy expectations. Instead, the appellant decided to provide the necessary area by way of a composite earth construction including a very large supporting embankment.[9] Construction took place between November 2009 and July 2011. Mr Park described the necessary works in these terms:6.6. The East RESA as built has the following features:6.6.1. The required length of 90m and width of 90m was achieved by an engineered fill platform over the Shotover River embankment and compacting and battering the fill to provide a level and stable area that was grassed.6.6.2. The RESA area is security fenced around its eastern end but otherwise is simply a grassed area gently sloping from runway end level down towards the east.[10] The depreciation deductions claimed in the relevant tax years are:4(a) On the basis that the East RESA is runway (the published depreciation rate being 4 per cent on a straight line value basis (SL)):(i) $417,078.34 for the 2012 income year; and(ii) $419,062.66 for the 2013 income year.4 High Court judgment, above n 1, at [32].(b) Alternatively, on the basis that the East RESA is hardstanding or road (the published depreciation rate being 3 per cent SL):(i) $312,808.75 for the 2012 income year; and(ii) $314,296.99 for the 2013 income year.The relevant provisions of the Income Tax Act[11] Part D of the ITA deals with permitted deductions for income tax purposes generally, including amounts for depreciation losses. In terms of s DA 1 (describedin the legislation as the "general permission") a deduction is allowed for an amountof expenditure or loss, including depreciation loss, to the extent the expenditure or loss is incurred in deriving assessable income.[12] Section EE 1 of the ITA provides that a person has an amount of"depreciation loss" if:(a) The person owns a relevant item of property;5(b) The item is depreciable property;6(c) The item is used, or is available for use, by the person in the relevant income year; and(d) The amount of depreciation loss is calculated under the relevant provisions of the ITA.7[13] We now set out the critical provisions relevant to the present case:EE 6 What is depreciable property?Description(1) Depreciable property is property that, in normal circumstances, might reasonably be expected to decline in value while it is used or available for use—(a) in deriving assessable income; or5 As described in ss EE 2–EE 5.6 As described in ss EE 6–EE 8.7 Sections EE 9–EE 11.(b) in carrying on a business for the purpose of deriving assessable income.Subsections (2) to (4) expand on this subsection.Property: tangible(2) An item of tangible property is depreciable property if—(a) it is described by subsection (1); and(b) it is not described by section EE 7.[14] Section EE 7 describes what is not depreciable property. Relevantly:The following property is not depreciable property:(a) land other than depreciable intangible property, although buildings, fixtures, and the improvements listed in schedule 13 (Depreciable land improvements) are depreciable property if they are described by section EE 6(1):[15] The effect of s EE 7(a) is that, in general, land is not depreciable property. However, exceptionally, buildings, fixtures and the improvements listed in schedule 13 are depreciable property so long as they otherwise meet the requirements of s EE 6(1).[16] Schedule 13 specifies 18 items that are permitted as depreciable land improvements:1 airport runways2 bores and wells3 bridges4 chimneys5 culverts6 dams7 fences8 hardstanding9 reservoirs10 retaining walls11 roads12 spillways13 swimming pools14 tanks15 tunnels16 wharves17 pipes18 purpose-built surfaces for outdoor sports facilitiesKey issues[17] The issues in the present case are relatively narrow since it is common ground that:(a) The appellant owns the relevant land and incurred the costs of construction of the eastern RESA;(b) The costs of construction satisfied the general permission in ss DA 1(1) and EE 6(1) on the basis that the costs were incurred by the appellant in the course of carrying on a business for the purpose of deriving its assessable income;(c) The eastern RESA and the embankment constitutes "land" for thepurposes of s EE 7(a);8 and(d) The quantum of the depreciation loss claimed is correctly calculatedif the appellant's alternative contentions are accepted.[18] The appellant accepts that, in order to be entitled to deduct the depreciation losses, it must establish that:(a) In terms of s EE 6(1) the eastern RESA is an item which in normal circumstances might reasonably be expected to decline in value while used or available for use; and8 In the High Court there was debate as to whether there was a distinction to be drawn between the RESA itself and the supporting embankment. However, it is now common ground that thewhole engineered structure constitutes "land" for depreciation purposes.(b) In terms of schedule 13, the eastern RESA falls within one of the categories relied upon — as an airport runway or as hardstanding.The approach in the High Court[19] In the High Court, Brown J discussed the rationale for allowing deductions for depreciation of capital assets.9 He also canvassed the legislative history of the current depreciation provisions and the background leading to the enactment of schedule 13 in particular.10 The Judge then turned to consider the textual meaning of airport runways.11 He discussed in considerable detail definitions of airports and aerodromes in other legislation. This material was not referred to in argument beforeus because it is common ground that if the eastern RESA is a "runway" for the purposes of schedule 13 then it is undoubtedly an "airport runway". We need say nomore about this aspect of the case.[20] Directly addressing the meaning of "airport runways" the Judge said:[108] The phrase first appeared in the taxation legislation in 1993 bywhich time the use of the word "airport" was well established in legislationand contemplated a reasonably sophisticated public aerodrome providing passenger and cargo services and other facilities. I infer that in selecting that phrase for inclusion in the 1993 depreciation regime the legislature was intending to identify runways comprising paved areas constructed in such a manner as to safely cater for the landing and take off of the kind of aircraft engaged in the delivery of such passenger and cargo services.[109] Runways of that nature would be subject to significant wear and tear from the effects of the landing and taking off of substantial aircraft with significant payloads. They could be expected to require not only regular maintenance but reconstruction from time to time. As such they would be appropriate candidates for a depreciation regime unlike, for example, runways of turf or compacted earth.[110] I consider that such an interpretation of the phrase is lent support by the general characteristics of a number of the other items listed in Schedule 13, namely those whose construction would involve significant alteration of the land surface and which, on construction, would become integrated with the land, in particular bores and wells, culverts, dams, retaining walls and tunnels.(Footnote omitted.)9 High Court judgment, above n 1, at [22].10 At [45].11 At [61].[21] Brown J then considered relevant legislative materials and Inland Revenue policy documents in order to cross-check his textual interpretation of the term"airport runway" against the apparent legislative purpose. He concluded that these materials indicated:[115] airport runways were recognised as assets which, whileconstructed on the land and thereby in a sense part of the land, represented an improvement to the land at significant cost both at initial construction and at regular intervals in the future. As the commentary on the 2008 Bill noted, not allowing depreciation deductions could discourage investment in such improvements to land.(Footnote omitted.)[22] Brown J's conclusion was that the legislative purpose of the depreciability of the various land improvements described in schedule 13 was not only consistent withbut also sustained his conclusion as to the textual meaning of "airport runways".12[23] Addressing the appellant's argument that the RESAs were an integral part of the operation of the airport and were regarded as part of the broader runway system, the Judge said:[119] the interpretation I have placed on the phrase has the consequencethat whether a RESA is to be treated as being part of an airport runway doesnot turn simply on "runway" being broadly construed to encompass other components of the "runway system" concept. A RESA could only fall withinthe phrase as used in Schedule 13 if the RESA was constructed to the standard required for an airport runway.[120] The East RESA is not so constructed. As the Commissioner'ssubmissions noted, the East RESA is covered in grassed topsoil and, aside from some minor maintenance, the grass surface is considered to have an indefinite life span. It is not possible for an aircraft to land on or take off from that surface.[121] Consequently my conclusion is that the East RESA does not comewithin the phrase "airport runways" in Schedule 13 and is not therebyexcised from the ambit of "land" in s EE7(a).[24] Brown J went on to recognise an argument that taxiways may be regarded as part of the airport runway if suitably constructed. He considered this could be true also of other elements of the runway system — including RESAs — provided they were suitably constructed.12 At [116].[25] After rejecting the appellant's alternative arguments that the RESAs could betreated as hardstanding or a road, the Judge turned to consider whether, if he were wrong in concluding that the RESAs fell within schedule 13, the eastern RESA was"property that, in normal circumstances, might reasonably be expected to decline in value while it is used or available for use". In a passage strongly criticised byMr Goddard QC for the appellant, the Judge said:[160] I accept the distinction which the Commissioner draws between a long-life asset, that is expected to be infrequently used and is designed to have a useful life of at least 100 years, and an asset (such as the pavement of a runway or a road) that, because of wear and tear from intensive use, will typically require replacing in five to 15 years.[26] Brown J's conclusions on this issue were expressed in these terms:[164] I agree with the Commissioner's submission that any damage to theEast RESA is most likely to occur only in the rare event of an aircraft undershooting or overrunning the runway. Even then it is to be expected that only a small portion of the top layer of the embankment would be damaged,for example in the form of the ruts caused by an aircraft's wheels. The evidence was that such damage could be repaired by grading and resowing grass which is minor work similar to regular maintenance.[165] Consequently I conclude that [the appellant] has not established that the East RESA and the embankment are property that, in normal circumstances, might reasonably be expected to decline in value while they are used or are available for use.The argument for the appellant[27] The central theme of Mr Goddard's submissions in support of the appeal wasthat the High Court Judge had adopted, without regard to the purpose of the depreciation rules, a narrow construction of the relevant categories of schedule 13 improvements and had left until last what should have been the starting point: the general meaning of depreciable property. A related criticism was that the overarching question as to whether the eastern RESA was depreciable property under the ITA had become lost in an analysis of various meanings of airport runway in unrelated contexts and, in particular, in the context of the Civil Aviation Rules inwhich counsel submitted "runway" tends to be given a specialised meaning.[28] Mr Goddard supported this submission by reference to authorities emphasising the centrality of purpose in ascertaining the meaning of an enactment.13Construed more broadly and in accordance with the statutory purpose of the depreciation provisions of the ITA, he submitted the eastern RESA was part of therunway system and fell within the term "airport runway" in schedule 13 oralternatively could be treated as "hardstanding" under the schedule.Our approach[29] We do not agree that the Judge lost sight of the proper approach to the statutory interpretation question arising in this case. He recorded the approach the parties were agreed upon,14 as explained in Commerce Commission v Fonterra Co-operative Group Ltd:15[22] It is necessary to bear in mind that s 5 of the Interpretation Act 1999 makes text and purpose the key drivers of statutory interpretation. The meaning of an enactment must be ascertained from its text and in the light of its purpose. Even if the meaning of the text may appear plain in isolation of purpose, that meaning should always be crosschecked against purpose in order to observe the dual requirements of s 5. In determining purpose the court must obviously have regard to both the immediate and the general legislative context. Of relevance too may be the social, commercial or other objective of the enactment.[30] Moreover, the Judge considered both the text and purpose of the ITA as part of his analysis. He also had regard to the general legislative context including the relevant parts of the Civil Aviation Rules applicable to runways and airports generally.[31] We have already set out the text of the relevant provisions of the ITA16 and now turn to consider the relevant legislative history of depreciation provisions in New Zealand tax legislation.13 Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36, [2007] 3 NZLR 767 at [22]; Terminals (NZ) Ltd v Comptroller of Customs [2013] NZSC 139, [2014] 1 NZLR 121 at [39]; and Lean Meats Oamaru Ltd v New Zealand Meat Workers and Related Trades Union Inc [2016] NZCA 495 at [11].14 High Court judgment, above n 1, at [35].15 Commerce Commission v Fonterra Co-operative Group Ltd, above n 13 (footnotes omitted).16 See above at [11]–[16].Depreciation — legislative history[32] Depreciation provisions were first enacted in New Zealand tax legislation in 1894.17 This enabled the Commissioner to allow a deduction for the depreciation ofimplements, utensils, or machinery that "could be made good by repairs, or by being rendered obsolete or useless". The original depreciation provision has beensubject to numerous amendments but the basic structure of the depreciation provisions remained largely unchanged at least until 1986.18[33] In that year, a report was prepared by a committee in relation to taxation in the primary sector known as the Brash Committee.19 The Committee's report statedthat, for many years, those engaged in the primary sector had been able to claim a wide range of capital expenditure or development expenditure as fully deductible against current income. The Committee noted that in all other sectors, taxpayers could depreciate their assets over the useful lives of those assets.20 Denying the same right to taxpayers in the primary sector was seen as imposing a significant penalty on those taxpayers. The Brash Committee recommended that expenditure on land improvements, whether new or of a replacement nature, be capitalised and, except in very limited circumstances, depreciated. The Committee commented that, in practice, there would be very few investments in land improvement which would not be depreciable.21 A list of activities with associated recommended depreciationrates was set out in the Committee's report. The list included, for example,expenditure in the primary sector on dams, wells and bores, irrigation work and temporary airstrips.[34] The Brash Committee's recommendations were implemented by the Income Tax Amendment (No 4) Act 1986. Amongst other things, a new Thirteenth Schedule containing depreciable items was included. The only reference to expenditure in17 When a proviso was added to schedule F of the Land and Income Assessment Act 1891 by s 18 of the Land and Income Assessment Acts Amendment Act 1894.18 Section 108 of the Income Tax Act 1976 was a central provision allowing for the deduction of depreciation expenditure for fair wear and tear or obsolescence in respect of plant, machinery, equipment and temporary buildings.19 Report of the Consultative Committee on Primary Sector Taxation to the Ministers of Finance, Agriculture and Forests (9 May 1986).20 At 44.21 At 45.relation to the activities of aircraft was to "the construction of aeroplane landingstrips to facilitate aerial topdressing of the land".22[35] Other changes to tax legislation in 1986 brought airport operators into the tax system.23 In February 1989 the Inland Revenue Department published its policy on the depreciation of airport runways in Public Information Bulletin 178:FactsThe airport runway is the main asset of the airport being significant in both construction and cost. Representations were made to the Department to treat this asset like other business assets and depreciate it.The asphalt runways usually require a thin resealing every 3–4 years to prevent moisture from seeping into, and damaging, the foundation of the runway. A more comprehensive sealing is required at approximately 15 yearly intervals.DecisionThe airport runways may be depreciated at the rate of 2% cost price. The 3–4 yearly thin reseal, and normal day to day repairs are to be treated as repairs and maintenance and are allowable in full as a deduction in the year in which they are incurred.The 15 yearly major reseal is considered to be in the same nature as the original construction cost and should therefore be added to the cost of the runway and depreciated accordingly.[36] In 1991 a discussion paper was produced by the Consultative Committee on the Taxation of Income from Capital (known as the Valabh Committee).24 The then definition of depreciable property was considered to be deficient because it was too narrowly defined and gave little indication of the applicable criteria.[37] The Valabh Committee noted that the class of depreciable property was then determined by a combination of statutory and administrative criteria.25 Amongst other things, the Committee commented:2622 Clause (k) in pt 1 of the Third Schedule to the Income Tax Amendment (No 4) Act 1986.23 By the introduction of s 197A of the Income Tax Act 1976 by s 24(1) of the Income Tax Amendment Act 1986.24 Consultative Committee on the Taxation of Income from Capital Tax Accounting Issues(31 January 1991).25 At [8.5.2].26 At [8.5.2].In general, the approach adopted by the Commissioner has been to exclude from the class of depreciable property those assets that are not used in the derivation of assessable income, as well as those assets that are not expected"systematically" to decline in value over the estimated useful life of theasset....As such, the approach adopted by the Commissioner is broadly consistent with that adopted for financial accounting purposes. Both approaches seek to improve the measurement of income by recognising losses in the value of fixed assets on an accruals rather than a realisation basis, and both seek to restrict depreciation to assets that are expected to fall in value over the ownership period. That is, depreciation is generally limited to those assets whose values are expected to fall over the useful life in accordance with an assumed trend (such as straight line or diminishing value).The Committee concurs with this approach and considers that it should be given legislative effect by modifying the legislation to define explicitly the class of depreciable property. ...[38] The alternative definition proposed by the Committee was expressed in these terms:27The Committee considers a broader, more explicit, definition of depreciable property would better reflect the scheme of the depreciation regime. We recommend that depreciable property should be explicitly defined in the legislation to:(a) include all tangible and intangible property used or available for use by a taxpayer in gaining or producing gross revenue, or used or available for use by a taxpayer in carrying on a business for the purposes of gaining or producing gross revenue; and(b) exclude trading stock, land (apart from improvements), financial arrangements, assets not expected to decline in value over their estimated useful life, and assets for which deductions by way of amortisation or depreciation are allowed by other sections of the Act.[39] In a paper prepared in 1992 Inland Revenue officials proposed to the Ministers for Finance and Revenue that certain agriculture, horticulture and aquaculture assets as well as non-agricultural land improvements should be subject to the general depreciation provisions of the then tax legislation.28 Brown J summarised the paper:29[46] The 1992 paper recorded the background in this way:27 At [8.5.4].28 Inland Revenue Depreciation of Land Improvements other than Buildings (14 August 1992).29 High Court judgment, above n 1.8. Under general law anything that is attached to the land becomes part of the land. The effect is that any improvements to or on the land are regarded as part of the land and receive the same treatment for depreciation purposes as the land. Section 108 of the [Income Tax Act 1976] has in the past denied a deduction for depreciation of land (and land improvements) but permitted a deduction to the extent that the improvements could be classified as premises. Assets such as buildings and airport runways qualified fordepreciation purposes as "premises". The repairs and maintenance of all improvements were, however, deductible.[47] The paper further stated:16. To ensure equitable treatment to all sectors of the economy the treatment of land improvements should be standard across all those sectors. Although land does not in itself depreciate, structures or improvements on the land do and therefore they should be depreciable. This means that a fence should receive the same depreciation treatment whether it was employed in the farming, forestry or manufacturing sectors. Further, there would appear to be no valid reason why buildings alone should be the only land improvement than can be depreciated.17. Land improvements can be broken down into three principal categories. The first is improvements to the land. These are improvements made to the land itself by way of contouring, levelling, draining, excavation, filling, reclaiming, making retaining walls, and so on. The second category is improvements on the land. These are improvements which add to the land by way of a structure or other improvement which is in addition to the land itself, such as fences, dams, cables and bridges. Finally improvements growing in the land such as fruit trees and vines, crops, pastures and shelter belts.[40] As the Judge said:[48] While the first category of improvements were considered to be inseparable from the land, in general the second and third categories were viewed as depreciable property, being separately identified assets distinct from the land and subject to loss in value due to wear and tear or obsolescence. However the paper concluded that land improvements which were to be depreciable would be difficult to define. Consequently it was recommended that land improvements should be depreciable to the extent listed in a schedule to the statute. It was further proposed that such a list should be able to be supplemented by way of Order in Council.[41] An indication of the rationale for these proposals may be gained from thepaper's observation that:3023. To be depreciable, however, the property must be expected to decline in value due to normal wear and tear over its life, subject to normal repairs and maintenance being carried out. Therefore assets that do not depreciate if normal repairs and maintenance are carried out will not be subject to depreciation. For example a breakwater, while needing constant repairs to its outer wall, can be expected to last indefinitely if these repairs are carried out.[42] The legislative response was to enact the Income Tax Amendment Act 1993. This contained a definition of depreciable property in largely similar terms to the current legislation. The new s 107A of the ITA contained definitions, including, relevantly:'Depreciable property', in relation to any taxpayer,—(a) Means any property of that taxpayer which might reasonably be expected in normal circumstances to decline in value while used or available for us by persons—(i) In gaining or producing assessable income; or(ii) In carrying on a business for the purpose of gaining or producing assessable income; but(b) Does not include—(i) Trading stock (as defined in section 85(1) of this Act) of the taxpayer:(ii) Land (excluding buildings and other fixtures and such improvements as are listed in the Twenty-first Schedule to this Act):[43] The Twenty-first Schedule to the 1993 amending legislation contained items 1 to 16 in the same form as the current schedule 13. Two further items in the current schedule 13 (pipes and purpose-built surfaces for outdoor sports facilities) were added with effect from 1 April 2008.3130 Inland Revenue, above n 28.31 By s 581 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009.[44] A commentary on the bill introduced to give effect to these and other changes was prepared by officials in the Inland Revenue Department. It stated:32Under existing tax law, land is not generally considered to be depreciable property. However, certain improvements to the land, that in a legal sense become part of the land, do depreciate over a reasonably easily determinable period. Not allowing depreciation deductions on these improvements may discourage investment in making improvements to land.The first category added to the list, "pipes and conduit", deals with anomission dating back to when the current tax depreciation rules wereintroduced in 1993. The second category inserted, "purpose-built surfacesfor outdoor sports grounds", is in response to two requests for two types of land improvements to be added to the list of depreciable land improvements.The first request relates to "stabilised turf" (a composite of natural turf andsynthetic materials) and the second relates to an equestrian arena.Both types of land improvement depreciate and should be added to the list. The proposed wording broadly captures these types of surfaces and will allow the Commissioner to make depreciation determinations for these and other types of purpose-built surfaces for outdoor sports grounds (for example, tennis courts and artificial turf).The interpretation issue — analysisDepreciation policy[45] The policy underlying the current depreciation rules in the ITA is to allow the deduction of the cost of depreciation in respect of assets used or available for use in deriving assessable income when the value of those assets is reasonably expected to decline in value over their estimated useful life. The rationale for allowing a deduction for depreciation is that capital assets used in the production of income will eventually wear out and need to be replaced in whole or in part. The permitted deductions are based on a proportion of the cost of the asset and are fixed by the Commissioner in accordance with an assumed trend (straight line or diminishing value). An allowance for the capital cost of replacement of such assets is set offagainst each year's income over the anticipated life of the assets in question. Inaddition, the cost of repairs and maintenance may be deducted in the income years in which the cost is incurred. When depreciable assets are disposed of, the ITA allows for adjustments where an asset has been over- or under-depreciated.3332 Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill (commentary) at 151–152.33 Income Tax Act 2007, ss EE 48–EE 52.[46] Land (apart from certain specified land improvements) is not depreciable because, unlike other assets, it does not have a determinate design life after which replacement in whole or in part is expected to be necessary. Nor is it expected to decline in value over time through ordinary wear and tear.[47] The text of the ITA makes it clear that the items listed as improvements in schedule 13 are exceptions to the general rule that land is not depreciable. There is nothing to suggest Parliament intended that the generous approach advocated by the appellant should be adopted in interpreting the specified items. The structure of the relevant provisions does not support this. Rather, Parliament has chosen to specify the items it has concluded are to be treated as exceptions to the general prohibition on the depreciation of land.[48] The analysis in the 1992 officials' paper we have set out above is helpful inidentifying two relevant categories of land improvements.34 The first is improvements to the land itself such as contouring, levelling, draining, excavation, filling, reclaiming and making retaining walls. These were considered to be inseparable from the land and not likely to be subject to loss in value due to wear and tear or obsolescence. The second category comprises structures or other additions to the land itself that were considered likely to diminish in value over time due to fair wear and tear. The examples given were fences, dams, cables and bridges. Since it was considered this category would be difficult to define, the list approach was prepared and adopted.[49] The items listed in schedule 13 clearly reflect this approach and may be regarded as improvements or additions on or under the land itself. The items listed are likely to be subject to fair wear and tear such that they would ultimately require replacement in whole or in part during their anticipated design life."Airport runway"[50] Against that background we turn to the critical interpretation of "airport runway". In the absence of any definition of this term in the ITA, we first consider34 See above at [39].the natural and ordinary meaning of that expression. We are satisfied that, in ordinary parlance, an airport runway is understood to mean that part of an airport upon which aircraft take off and land. The main runway at Queenstown Airport has a bituminous surface upon which aircraft take off and land. In contrast the RESAs are grassed areas beyond the paved runway not used for take-offs and landings except in an emergency when an aircraft may overrun or undershoot the runway.[51] The Judge drew support for his view as to the interpretation of airport runways from relevant definitions in the Civil Aviation Rules. The definition of"runway" under the Rules is consistent with the natural and ordinary meaning of theterm:Runway means a defined rectangular area on a land aerodrome prepared for the landing and take-off of aircraft:[52] At the take-off end(s) of a runway there may be a stopway:Stopway means a defined rectangular area on the ground at the end of the take-off run available prepared as a suitable area on which an aircraft can be stopped in the case of an abandoned take-off.[53] Both the runway and any stopway are contained within an area known as the runway strip:Runway strip means a defined area including the runway, and stopway (if a stopway is provided), that is intended—(1) to reduce the risk of damage to an aircraft running off the runway; and(2) to provide obstacle protection for aircraft flying over the runway strip during take off or landing operations:[54] At the take-off end(s) of a runway there will also be an area known as a clearway:Clearway means a defined rectangular area on the ground or water, at the departure end of the runway—(1) under the control of the aerodrome operator; or(2) with the agreement of the authority controlling the clearway—selected or prepared as a suitable area over which an aeroplane may make a portion of its initial climb to a specified height:[55] It is significant that the definition of stopway, runway strip and clearway all refer to areas beyond the end of the runway itself. So too the description of the physical characteristics for RESAs. Appendix A to pt 139 of the Civil Aviation Rules, adopted in 2006, describes the physical characteristics for RESAs in these terms:Appendix A—Aerodrome physical characteristicsA.1 Physical characteristics for RESA(a) A RESA must extend—(1) to a distance of at least 90 metres from the end of the runway strip, and(2) if practicable—(i) to a distance of at least of at least 240 metres from the end of the runway strip; or(ii) to the greatest distance that is practicable between the 90 metres required in paragraph (a)(1) and the 240 metres required in paragraph (a)(2)(i).(b) The width of a RESA must—(1) be at least twice the width of the associated runway and be positioned symmetrically on either side of the extended centre line of the runway; and(2) where practicable, be equal to the width of the graded portion of the associated runway strip.(c) A RESA must be constructed to—(1) provide a cleared and graded area to reduce the risk of damage to an aeroplane that undershoots or overruns the runway; and(2) where practicable, be clear of any object which might endanger an aeroplane that undershoots or overruns the runway.(d) A RESA must not penetrate the approach or take-off climb surface for the runway.(e) If a RESA has a longitudinal slope—(1) any downward slope must not exceed 5%; and(2) slope changes must be as gradual as practicable; and(3) abrupt changes or sudden reversals of slopes must be avoided.(f) If a RESA has a transverse slope—(1) any upward or downward slope must not exceed 5%; and(2) slope changes must be as gradual as practicable.[56] The Judge helpfully set out a diagram illustrating the relationships between the runway, the runway strip and the RESAs. This was prepared on the assumption of a runway at the Queenstown Airport of 45 metres in width. Any stopway would be in the area of a runway strip between the runway and the RESAs. As the Judge pointed out,35 the layout depicted in the diagram could not accommodate stopways because the runway strip is required to extend 60 metres beyond both the end of the runway and any stopway:[57] There are obvious distinctions between the runway and RESAs in their usage and maintenance requirements. The evidence established there are approximately 8,000 take-offs and landings combined per annum on the main runway at Queenstown Airport by commercial jets and light aircraft. The primary usage is by the Airbus A320 aircraft that has a maximum take-off weight in the vicinity of 60 to 70 tonnes. The significant loads placed on the runway cause the pavement to deteriorate such that expenditure on routine maintenance amounts to approximately $100,000 per annum. The design life of the paved runway at Queenstown is between35 High Court judgment, above n 1, at [18].five and 10 years. At the end of each life cycle, the runway surface must be completely replaced at a cost in the order of $10 million.[58] In contrast there have been no occasions to date on which an emergency has required the use of the RESAs. The grass surface requires only minimal maintenance. Over the two-year period following the completion of the eastern RESA and embankment, only a little over $19,000 was set aside for maintenance of this area. The grass surface is considered to have an indefinite lifespan (assuming minor maintenance, the cost of which is deductible). In the event of an emergency, any damage to the RESAs would be superficial. A jet aircraft would be expected to sink into the grassed topsoil to slow or stop its progress. Any repairs would be limited to filling any ruts and resowing.[59] In contrast to the high usage and short design life of the paved runway, the estimated design life of the embankment underlying the eastern RESA is estimated to be 120 years. Expert evidence was called from two geological engineers, Dr Brown for the appellant and Dr Pradel for the respondent. The evidence of Dr Pradel is most helpful with regard to the design life of the underlying embankment. His views in this respect were strongly relied upon by Mr Goddard.Dr Pradel's evidence was that the critical element for establishing the design life of the hillside slope under the eastern RESA is the manmade Geogrids used to reinforce the outer face of the hillside fill. These are manmade engineered meshes made of high strength polymers that are placed in horizontal layers to reinforce the slope. They penetrate the outer edge of the slope by about three to four metres. They are placed at only one level in the embankment around its semi-circular circumference.[60] The Geogrids reinforce the outer slopes of the embankment and enable theslopes to be built at steeper angles than similar unreinforced fill slopes. Dr Pradel'sview was that, in the unlikely event of failure of the Geogrids, a deep failure and total collapse of the hillside would not occur. It would likely result in "surficial" orskin failures. Any such failure would be localised, confined to the RESA slope bench, and a repairable event.[61] Addressing the 120-year certified design life of the geogrids, Dr Pradel said: I expect the outer face of the RESA slope will eventually require major work. The level and quality of the maintenance work will have a major influence on the timing of when this major work will be needed. It is likely that this work will be needed around the middle of the 22th Century, as the Geogrids no longer provide the intended strength and benefits considered by the original slope designers, and the increased regular costs of continued remediation and maintenance will no longer be considered economical by the owner.[62] The expert witnesses also addressed other possible scenarios that would require future expenditure over time including settlement of the fill material, deterioration in the effectiveness of the drainage layers in the fill, and an earthquake. Mr Goddard did not place any emphasis on these factors, focussing on the need for work to repair or replace the Geogrids at or around the end of their 120-year design life. We are satisfied that issues to do with settlement and drainage would not require significant work and are unlikely to affect the value of the RESA or the embankment over time. Mr Goddard also accepted that the risk of damage through seismic events was not material for present purposes since risks of that kind are appropriately categorised as abnormal natural events that could affect any asset.[63] In the light of Dr Pradel's evidence, it must be accepted that in the very longterm, the outer face of the eastern RESA slope will eventually require major work. There does not appear to be any evidence as to the nature of the work required or its cost. Nor is there any evidence of the extent to which the value of the supporting embankment might be diminished over time. All that can reliably be said is that a significant amount of work would be required to prepare or replace the Geogrids and the outer face of the RESA slope. There is no evidence that any work would be required to repair or replace the compacted gravels and soil comprising the great majority of the fill.Conclusions on "airport runway"[64] For the reasons given we agree with the Judge that neither the eastern RESA nor the supporting embankment at the Queenstown Airport falls within the term"airport runway" in schedule 13. Although we have adopted a slightly differentapproach to the interpretation issue, we are satisfied the Judge considered all material matters and did not err in his conclusions. In summary, the natural and ordinary meaning of airport runway is the area used for the take-off and landing ofaircraft. That interpretation is supported by the definition of runway in the Civil Aviation Rules. On the evidence the runway may reasonably be expected to decline in value while used or available for use within a five- to 10-year design life and its surface will require complete replacement within that period.[65] In contrast, the eastern RESA does not form part of the runway either in its natural meaning or under the Civil Aviation Rules. Nor is it intended or available for use by aircraft taking off or landing other than for use for safety reasons in an emergency. Unlike the airport runway, its overall design life is at least 120 years, after which one of its components (the Geogrids) is likely to require major work at or after that time.[66] Mr Goddard submitted that the fact the RESA had a relatively lengthy designlife did not necessarily support the Judge's interpretation of runway. He pointed outthat the design life adopted for most dams was 100 years. We acknowledge that point but we consider there are plain distinctions between a dam and a RESA. A dam may readily be viewed as an improvement to the underlying land. It is a distinct structure added to the land that is subject to wear and tear and likely to require replacement at the end of its design life. In contrast the RESA and supporting embankment is not obviously viewed as an improvement on or under the land as is the case for the other items in schedule 13.[67] Rather, we agree with the Commissioner's submission that the RESA andsupporting embankment effectively created new land as an engineered fill. In that respect the RESA may be regarded as similar to a reclamation in which dry land is created from land formerly inundated by the sea or by a body of fresh water. The interpretation adopted by the Judge is therefore consistent with the intention evident from the text of the legislation and from the background materials we have analysed that land is not generally a depreciable asset.[68] We do not accept the appellant's argument that the RESAs are airportrunways because they form part of the wider runway system. Mr Goddard submitted the airport could not lawfully be operated for international flights without the RESAs. He argued accordingly that they were an integral part of the overall runwaysystem. For the Commissioner, Mrs Courtney accepted that RESAs could be regarded as part of the wider runway system but we accept her submission that the RESAs are functionally and physically distinct from the airport runway for the reasons we have already set out.[69] Mr Goddard also submitted that a RESA was analogous to a gravel shoulder on a sealed road. We do not accept that submission. While a road needs a shoulder for safety reasons it is not a soft area designed to stop a vehicle that has lost control. It is usually formed with a hard surface such as gravel or seal and is designed for regular use by vehicles pulling over or stopping before continuing their journey. Its maintenance requirements are likely to be similar to those of the road surface. In all these respects, a road shoulder differs from the RESA at issue.[70] In his reply, Mr Goddard referred us to s EE 37 of the ITA which applies topermit a deduction for depreciation when a person makes an "improvement" to an item of depreciable property. An "improvement" is defined in s EE 67 as an"alteration, extension, or repair of an item of depreciable property that increases its capital value". Counsel submitted that the eastern RESA was an extension of theairport runway, an acknowledged depreciable asset.[71] This argument was not dealt with in the High Court judgment and we are unclear whether it was raised there. However, we are unable to accept it. We agree with Mrs Courtney that the RESA and supporting embankment could not beregarded as an extension of the "airport runway". The arguments we have alreadyrehearsed apply. The "airport runway" as we have interpreted it remains the sameand is not lengthened or extended by the RESA. If, as we have found, the easternRESA is not "airport runway" then, for the same reasons, it cannot be regarded as an extension of the airport runway as we have interpreted it.[72] We conclude this part of the judgment by referring to two matters that arose during argument. First, our conclusions are necessarily addressed to the eastern RESA at Queenstown Airport. We understand that RESAs are often (if not usually) physically distinct from the paved runways at New Zealand airports as is the case in Queenstown. However, in other cases, for example at Wellington Airport, theRESAs form a continuous part of the paved runway. We express no view upon and leave open the possibility raised by the Judge that in different circumstances a RESAmight be construed as falling within "airport runway" for depreciation purposes.[73] Second, we raised the possibility during argument whether Geogrids might fall within item 10 of schedule 13, namely retaining walls. We express no view about this possibility. We simply note it may be an available argument, should the appellant wish to advance it with the Commissioner.Hardstanding[74] Brown J noted that the term "hardstanding" is not defined either in the ITA orin the Civil Aviation Rules.36 It is of course a term that applies to hardstanding areas generally and is not confined to airports. After considering dictionary definitions cited by counsel the Judge expressed his conclusions in these terms:[144] I accept the submission for the Commissioner that one of the functions of hardstanding is to protect the land and allow its continued use in unfavourable circumstances such as high traffic and in locations required to support heavy vehicles carrying cargo or stock. Without paving protection the surface of land used in that way would quickly become deformed and unusable, particularly in wet weather.[145] I agree with the Commissioner's submission that hardstanding refersto an area that has been paved or surfaced with material that is both strongand hard. I recognise [the appellant's] contention that the subgrade of theembankment is compacted but as Mr Hoskin37 acknowledged in cross-examination it is not hardstanding. While a RESA must support the weight of an aircraft in the event of a takeoff or landing incident and must allow access for emergency vehicles, the fact that RESAs are designed so that jet aircraft will sink into their surface is inconsistent with their beingcategorised as "hardstanding".[146] I also consider that if a RESA was to be used for parking aircraft or other vehicles, other than for emergency use, it might reasonably be expected to have a hard surface. However parking is not permitted on theRESA as it must remain "clear of any object which might endanger an aeroplane that undershoots or overruns a runway".(Footnote omitted.)36 High Court judgment, above n 1, at [136].37 An aviation consultant who gave evidence for the appellant.[75] Mr Goddard submitted that, although the eastern RESA is not paved, it is made of compacted earth and gravels designed to be sufficiently hard to hold the static weight of an aircraft weighing up to 80 tonnes. It is also designed foremergency vehicles to travel across it. He further submitted that the Judge's relianceon the fact that the eastern RESA could not be used for parking aircraft overlooked the fact that the particular surface is a safety buffer, not a parking space.[76] We are unable to accept the appellant's submissions. In our view the term "hardstanding" is understood in ordinary parlance as referring to an area of hard material for a vehicle to stand on when not in use.38 Usually, such an area would be paved or at least constructed in such a way to support the weight of the vehicle for parking when not in use.[77] In the context of a commercial airport, we agree with the Commissioner'ssubmission that hardstanding denotes an area paved with a hard surface such as bitumen, concrete or heavy-duty pavers designed to bear the weight of aircraft or heavy vehicles. The expression is apt to describe areas such as airport aprons used by aircraft to stand or park when not in use. In terms of the Civil Aviation Authority Advisory Circular 139–6, taxiways and aprons are required to be constructed in a way that is at least as strong as the runway they serve and in a way that is capable of withstanding aircraft traffic.[78] We agree with the Judge that the eastern RESA is not "hardstanding" for thepurposes of the depreciation provisions of the RESA. As the Judge said, the RESA is designed and constructed to allow aircraft to sink into its surface to decelerate theaircraft in an emergency situation. That is the opposite of an area that is "hard". Second, the "standing" element of the term "hardstanding" should not beoverlooked. Plainly this is intended to refer to an area where a vehicle or aircraft may stand when not in use. The fact that the RESA might be designed to bear the weight of an aircraft for a short period in an emergency does not fall naturally within the meaning of "standing". There is nothing in the characteristics or purpose of aRESA to suggest otherwise.38 Shorter Oxford Dictionary (5th ed, Oxford University Press, Oxford, 2002) at 1205.[79] Mr Goddard also challenged the accuracy of the Judge's observation that thewitness Mr Hoskin had acknowledged that the eastern RESA was not hardstanding.39We have reviewed the transcript of Mr Hoskin's evidence. While it appears Mr Hoskin agreed that the RESAs at Queenstown Airport did not have any "pavement or hard stand" we acknowledge there might have been some room for argument aboutthe scope of the apparent concession. We do not place any weight on it for present purposes.Was the Judge correct to find that the eastern RESA was not property that, in normal circumstances, might reasonably be expected to decline in value while it is being used or available for use in terms of s EE 6(1) of the ITA?[80] The Judge found on the evidence before him that the appellant had not satisfied this requirement.40 In view of our conclusion that the Judge was correct to find that the eastern RESA was neither an airport runway nor hardstanding for the purposes of schedule 13 of the ITA it is not strictly necessary for us to deal with the second element the appellant was required to satisfy before it could be entitled to deduct the relevant costs of depreciation. That is whether, in normal circumstances, the eastern RESA might reasonably be expected to decline in value while used or available for use. However, in deference to the arguments presented we will nevertheless deal with this issue.[81] We make a number of points about the interpretation of the relevant part of s EE 6(1). First, the reference to normal circumstances refers to circumstances that might ordinarily be expected to affect the value of the relevant asset over time. Abnormal circumstances, of which an earthquake might be one, are excluded from consideration. Second, the assessment is ordinarily made at the time the relevant deduction is sought. Necessarily, this will involve a prediction of future events. Third, the test is objective in the sense that it would not be sufficient for a taxpayer to believe that the asset might deteriorate over time and therefore decline in value.There must be a reasonable basis for that expectation. Fourth, the expression "might reasonably be expected to decline in value" sets a relatively low threshold. So long as there is a reasonable prospect that the asset might decline in value in the future,39 High Court judgment, above n 1, at [145].40 We have set out the Judge's conclusions at [25] and [26] above.that is sufficient. Fifth, it is not necessary that the asset is actually used, only that it is available for use. Finally, we agree with Mr Goddard that the test does not require that the asset in question would require complete replacement at the end of its useful life.41 Nevertheless, the extent, nature and cost of any work required to reinstate the relevant asset may have a material bearing on the assessment of whether a decline in value might reasonably be expected.[82] With regard to the eastern RESA at the Queenstown Airport, we have already reviewed the relevant evidence.42 Contrary to the view of the Judge, we consider that Dr Pradel's evidence on this topic must be accepted. However, his evidencemust be placed in context. First, his acknowledgement that the Geogrids had reached the end of their design life after about 120 years and that major work would then be required was limited to the outer face of the eastern RESA slope. On the evidence, while the Geogrids are acknowledged to be an important component of the overall structure, the evidence shows that the Geogrids and the outer face of the eastern RESA slope comprise only a minor part of the overall structure, which is massive in scale.[83] There is no evidence to suggest that any work would be required to repair or reinstate the great majority of the compacted soils and gravels comprising the balance of the structure. No evidence was placed before the High Court as to the extent and nature of any work required, the cost of that work or the anticipated effect on the value of the asset overall. However, it is reasonable to infer on the evidence that the cost and any consequent effect on the long term value of the asset would likely amount only to a small fraction of the cost of the structure overall. Any amount properly deductible as depreciation would be reduced to a very low level accordingly.Dr Emery's brief of evidence[84] The appellant contended that the High Court erred in failing to rule on the admissibility of a brief of evidence of an expert witness called by the Commissioner,41 See, by analogy, the discussion of the distinction between repairs or maintenance and improvements of a capital nature in Poverty Bay Electric Power Board v Commissioner of Inland Revenue [1999] 2 NZLR 438 (CA) at 445.42 See above at [58]–[63].Dr Emery, a civil engineer with expertise in airports and roads. Although Dr Emery delivered an extensive brief of evidence, he was unwell at the time of the hearing in the High Court and unable to give evidence. The Commissioner sought consentfrom the appellant to admit Dr Emery's evidence under s 9(1) of the Evidence Act2006. The appellant opposed the introduction of material parts of Dr Emery's briefbut the document was provided to the Court on a provisional basis. The relevantparts of Dr Emery's brief were put to the appellant's witnesses duringcross-examination.[85] The Judge did not make a ruling on the admissibility of Dr Emery's brief andmade no reference to his evidence in the judgment. Mrs Courtney responsiblyaccepted that the Commissioner was not prejudiced by the Judge's failure to make aruling on admissibility. Given that it is not possible to determine what weight, if any,the Judge placed on Dr Emery's evidence, we do not place any weight on it for thepurposes of this judgment. It follows that no ruling is required as to the admissibility of that evidence.Result[86] For the reasons given, the appeal is dismissed. The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements. We allow for second counsel.Solicitors:Russell McVeagh, Wellington for AppellantCrown Law Office, Wellington for Respondent