Vector Limited v The Commissioner of Inland Revenue [2014] NZHC 2069

Vector Limited v The Commissioner of Inland Revenue [2014] NZHC 2069 [29 August 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2013-404-4266[2014] NZHC 2069BETWEEN VECTOR LIMITEDPlaintiffAND THE COMMISSIONER OF INLANDREVENUEDefendantHearing: 18, 19, 20 August 2014Counsel: L McKay, SE Fitzgerald, F Ward for plaintiffPH Courtney, JR Burns, RN Park for defendantJudgment: 29 August 2014Reissued: 18 November 2014JUDGMENT OF FAIRE JThis judgment was delivered by me on 29 August 2014 at 3pmpursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors: Russell McVeagh, AucklandCrown Law, Te Tari Ture O Te Karauna, WellingtonThe question for determination[1] The question that arises in this case is whether certain payments made by Transpower New Zealand Ltd to Vector Ltd in 2011 and 2012 are subject to income tax under s CC 1 of the Income Tax Act 2007.The issues[2] There are three issues that arise. The first two are whether the payments received by Vector Ltd are:(i) "Other revenues" under s CC 1(2)(g) of the Income Tax Act 2007; and(ii) Derived from a "lease, licence or easement affecting the land" for thepurposes of s CC 1(1)(a).[3] The third issue is raised by the plaintiff as an alternative in the event that it fails on both of the first two issues. The issue is whether the payments made relatingto the North Shore Transmission Corridor ("NSTC"), and referred to as the Northern consideration amount, should be apportioned.[4] The parties accept that the plaintiff is the owner of land for the purposes of s CC 1.[5] It is common ground that the amounts in question are not business income or income in the ordinary sense and that ss CA 1(2) and/or CB 1 of the Income Tax Act 2007 do not apply. The sole question is whether the amounts ought to be treated asVector's income under s CC 1.The relevant statutory provisions and definitions[6] Section CC 1 of the Income Tax Act 2007 provides:CC 1 LandIncome(1) An amount described in subsection (2) is income of the owner of land if they derive the amount from—(a) a lease, licence, or easement affecting the land; or(b) the grant of a right to take the profits of the land.Amounts(2) The amounts are—(a) rent:(b) a fine:(c) a premium:(d) a payment for the goodwill of a business:(e) a payment for the benefit of a statutory licence:(f) a payment for the benefit of a statutory privilege:(g) other revenues.[7] Section YA 1 of the Income Tax Act 2007 provides a number of definitions. The following are relevant to this case:estate, for land,—(a) means an estate in the land, whether legal or equitable, and whether vested or contingent, in possession, reversion, or remainder; and(b) includes a right, whether direct or through a trustee or otherwise, to—(i) the possession of the land:(ii) the receipt of the rents or profits from the land:(iii) the proceeds of the disposal of the land; and(c) does not include a mortgageinterest,—(d) for land, has the same meaning as estateland—(a) includes any estate or interest in land:(b) includes an option to acquire land or an estate or interest in land:(c) does not include a mortgage:lease—(a) means a disposition that creates a leasehold estate:The balance of the definition is not relevant to this case and is therefore omitted.leasehold estate includes any estate, however created, other than a freehold estateown,—(a) for land, means to have an estate or interest in the land, alone or jointly or in common with any other person:possession includes a use that is in fact or effect substantially exclusive[8] "Licence" is not defined in the Act. The licence here is to use land."Licence" has been defined:1In real property law, is an authority to do an act that would otherwise be a trespass.[9] "Easement" is not defined in the Act. The ordinary meaning of easement is:2A right enjoyed by a person over his or her neighbour's property, such as a right of way [10] An easement gives a person a right to use another's land in a particular way,or to prevent the other person from using their land in a particular way. Easementsmay be granted "in gross", that is, where the land over which the easement isenjoyed (the servient tenement) is not appurtenant to another parcel of land (the dominant tenement).1 Butterworths New Zealand Law Dictionary (7th ed, LexisNexis, Wellington, 2011).2 Butterworths New Zealand Law Dictionary.[11] Hinde McMorland and Sim provide the following:3 when a legal easement has been created the right granted is a jus inrem, or right availing against all the world, which permanently binds the land over which it is exercisable and permanently subsists for the advantage of the land for the benefit of which, or the person for whose benefit, it was created.Because an easement is, by definition, essentially a right owned by one person over the land of another, that is, the servient tenement, there cannot be an easement unless there is a servient tenement, and the servient tenementmust be defined as to area with sufficient certainty [12] In Auckland City Council v Man O' War Station, the Court held that an easement is not an estate, but is an interest in land.4Background[13] The plaintiff is an electricity distribution company. It is commonly referredto as a "lines company". It owns two electricity distribution networks in the greater Auckland region. It owns a range of assets, including land, plant and equipment. These are made available to retailers to deliver electricity to customers. It derives its income from lines charges.[14] The assets include an underground tunnel and what is known as the NSTC.[15] The Tunnel runs from Penrose to Vector's Hobson Street substation. The Tunnel is about 3 metres in diameter. It is approximately 60 metres below ground level. In 2000/2001 Vector installed a number of cable circuits in the Tunnel. Theyform a major part of Vector's transmission electricity network supplying theAuckland Central Business District. The plaintiff's title is made up of a series ofleases of the subsoil together with electricity rights in gross over certain titles.[16] The NSTC is a series of land rights which Vector owns. It consists of legal and equitable instruments which are joined together to make the Corridor and3 GW Hinde (ed) Hinde, McMorland and Sim: Land Law in New Zealand (looseleaf ed, LexisNexis) vol 2 at [16.001 and [16.003].4 Auckland City Council v Man o' War Station Ltd [1996] 3 NZLR 460 (HC) at 465.includes rights acquired as a result of the plaintiff entering into an agreement with North Shore City Council in 2006 under which it was granted further easements. These are referred to as the NSCC easements. It exists between a substation at Albany owned by Transpower New Zealand Ltd and the interchange at Constellation Drive and Upper Harbour Highway with the Northern Motorway. It has an overhead, 110 kV double circuit line that runs above the NSTC.[17] The Tunnel and the NSTC form part of Vector's electricity distributionnetwork. Vector derives its taxable income from the network structure. Both the Tunnel and the NSTC have capacity constraints which arise both from a physical and a heat perspective.[18] Both parties filed briefs of evidence from engineers. Both experts express views of the capacity of the Tunnel and the NSTC. I will refer to the relevant evidence later in this judgment.[19] Transpower New Zealand Ltd manages and operates the national electricity transmission grid in New Zealand. The plaintiff entered into an agreement with Transpower, which bears the date 14 June 2010 but which was apparently executed on 15 June 2010. The background and reason for that agreement is set out in the introductory section.INTRODUCTIONA Transpower manages and operates the national electricity transmission grid in New Zealand.B Vector is a utility company which owns and operates an electricity distribution system in certain parts of New Zealand, including Auckland. As a part of that system it has certain property rights in relation to the Tunnel, the North Shore Transmission Corridor, the Hobson Substation and the Wairau Substation.C It is a matter of national interest that electricity supply to, across and north of Auckland has an appropriate level of security for a city and region of its size and strategic importance.D To promote this objective:(a) Transpower submitted an investment proposal to upgrade the North Auckland and Northland grid (NAaN Grid Upgrade Plan) by, among other things, installing a cable connectionbetween the Penrose Substation and the Albany Substation and installing a new 220/110 kV transformer at the Penrose Substation. On 30 April 2009, the Electricity Commission approved the NAaN Grid Upgrade Plan.(b) Transpower and Vector propose to establish a new grid exit point at the Hobson Substation and a new grid exit point at the Wairau Substation.E Transpower wishes to use Vector's Infrastructure to carry out Transpower's Works. This agreement sets out the terms and conditions upon which Transpower will lay and install the Cablesand Equipment on, in and through Vector's Infrastructure.[20] Subject to a number of exceptions the agreement provides for a termination on 30 June 2101.[21] In summary the agreement provides for the plaintiff to grant Transpower:(i) A two-thirds share in the NSCC Easements to be granted to the plaintiff;(ii) A two-thirds share in the NSTC Easements; and(iii) Easements over the plaintiff's freehold land in the NSTC.[22] Those provisions are referred to in this judgment, and in the papers, as "the Northern Easements".[23] The agreement, in addition, granted:(i) An access right to use and occupy part of the Tunnel and the HobsonSubstation to be solely occupied by Transpower's cables;(ii) An easement over the Hobson Substation to the extent required;(iii) An easement over the Hobson Street grid exit point and the Wairau Road GXP.The access right to the Tunnel referred to in [23](i) above was called, in the papers,the Southern Access Right. The other two easements are called the Additional Easements.[24] The agreement provides for Transpower to pay the plaintiff $3,113,561.64 for the Northern Easements. This payment is referred to as the Northern consideration amount. It also provides that Transpower is to pay the plaintiff $50,000,000 plus GST in two instalments of $25,000,000 plus GST for the Southern Access Rights. These payments are referred to as the Southern consideration amount.[25] This proceeding does not concern the non-monetary payment for the additional easements which were provided for by way of an additional easement swap.[26] The consideration for the Northern Easements and the first instalment for the Southern Access Right were paid to the plaintiff on 1 June 2011. The second instalment in respect of the Southern Access Right was paid to the plaintiff on 1 June 2012.[27] In each of its 2011 and 2012 income tax returns the plaintiff returned one- sixth of the total amount, being $8,852,260.30 per year as income under s CC 1 of the Income Tax Act 2007. The plaintiff spread the amounts according to s EI 7 of the Income Tax Act 2007 over six years. The tax on that income was $2,655,678 for the 2011 and $2,478,632.88 for the 2012 year.[28] There is no case law on s CC 1 that directly deals with the first two issues that are raised in [2] of this judgment.[29] The plaintiff issued a notice of proposed adjustment. It proposed to adjust its assessable income on the basis that the payments were non-taxable capital receipts. After attending a conference, the parties agreed that the dispute should be truncated and the matter referred to the court for determination. The broad question to be determined is whether the payment made in respect of the Southern Access Right and for the Northern Easements constitutes income under s CC 1 of the Income Tax Act 2007.Principles of statutory interpretation[30] The Court is required to determine the meaning of the words "other revenues" as they appear in s CC 1(2)(g) and "derived .. from" as they appear in s CC 1(1) of the Income Tax Act 2007. This is necessary to determine whether the payments come within the scope of s CC 1 of the Income Tax Act 2007.[31] The starting point is s 5 of the Interpretation Act 1999 which provides:(1) The meaning of an enactment must be ascertained from its text and in the light of its purpose.(2) The matters that may be considered in ascertaining the meaning of an enactment include the indications provided in the enactment.(3) Examples of those indications are preambles, the analysis, a table of contents, headings to Parts and sections, marginal notes, diagrams, graphics, examples and explanatory material, and the organisation and format of the enactment.[32] Section 5(1) has been described as "the 'Cardinal Rule', as it has rightly be dubbed, is not at the option of the Judges. The direction, now given in s 5(1) of theInterpretation Act, is mandatory".5[33] Ms Courtney summarised correctly the principles of interpreting legislation as extracted from the Supreme Court decision in Commerce Commission v Fonterra Co-operative Group Ltd as follows:6(i) the statutory text must be considered in isolation of purpose to determine its plain and ordinary meaning or meanings;(ii) the meaning, or possible meanings, of the text must then be cross- checked against the purpose of the legislation; and(iii) in determining purpose, regard must be had to both the immediate and general nature of the context; it may also be relevant to consider the social, commercial or other objective of the legislation.5 R v Pora [2001] 2 NZLR 37 (CA) at [103].6 Commerce Commission v Fonterra Co-operative Group Limited [2007] NZSC 36, [2007] 3 NZLR 767.[34] The position in relation to revenue statutes was the subject of comment by the Supreme Court in Stiassny v Commissioner of Inland Revenue as follows:7[23] In this country, the general approach to the interpretation of a revenue statute is much the same as for other statutes. The purpose of a taxing provision may be a guide to its meaning and intended application. But, as Burrows and Carter point out, in most cases the only evidence of that purpose is the detailed wording of the provision and the safest method is to read the words in their most natural sense. In construing and applying a taxing provision, a court leans neither for nor against the taxpayer, but should require that before the provision is effectual to make the taxpayer amenable to the tax, it uses words which, on a fair construction, must be taken to impose that tax in the circumstances of the case. [citations omitted][35] Reference to the legislative history may be helpful as an aid to its construction.8 The Court may have regard to surrounding law and other material as a guide to interpretation. The Court may admit and use parliamentary history including:9(i) reports of Committees or Commissions recommending the legislation, for example the report of a Law Committee or the Law Commission;(ii) the explanatory note accompanying the introduction copy of the Bill;(vii) the debates in Parliament during its passage.[36] The importance of considering the plain words of a statutory provision is well illustrated by the decision in Commissioner of Inland Revenue v McKenzie (NZ) Ltd.10 The High Court had concluded that because there was an expressed rule that provided that premiums paid on the grant of a lease were assessable income to the recipient and deductible to the payer, it must follow that Parliament intended that similar amounts paid in the event of a surrender of the lease should also respectfully7 Stiassny v Commissioner of Inland Revenue [2012] NZSC 106, [2013] 1 NZLR 453.8 Marac Life Assurance Ltd v Commissioner of Inland Revenue [1986] 1 NZLR 694 (CA) at 703 and 701; and Commissioner of Inland Revenue v Alcan New Zealand Limited [1994] 3 NZLR 439 (CA) at 443.9 JF Burrows and RI Carter Statute Law in New Zealand, (4th ed 2009 LexisNexis, Wellington, 2009) at 258 and 263.10 Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988] 2 NZLR 736 (CA).be assessable income and deductible. The Court of Appeal did not accept that view. The Court held that the relevant statutory provisions on their plain words did not provide for the assessability or deductibility of lease surrender payments. The Court of Appeal said:11With respect to the Judge, we consider that the provisions of the Income Tax Act referring to the income tax treatment of receipts and payments in relation to other kinds of lease transactions are an insubstantial foundation from which to draw inferences as to the assessability or deductibility of payments in respect of the surrender of leases, one way or the other. ... But premiums paid or received on the surrender of a lease are not dealt with at all under those statutory provisions. ... In the circumstances it would be unsafe to draw any inference of a legislative purpose other than that their character as capital or income fall for determination on general taxation principles.Legislative history[37] Ms Courtney traced the history of this legislation back to the Land and Income Tax Assessment Act 1891. She referred to changes introduced by s 11 of the Finance Act 1915 and in particular to s 11(g) of that Act. That made assessable incomefrom rents, royalties, fines, premiums and other revenues (including payments for or in respect of the goodwill of any business, or the benefit of any statute, licence or privilege) derived by the owner of land or any estate or interest in land therein from any lease, licence or easement affecting the same or for the grant of any right of taking the profits thereof.She submitted that it would appear that s 11(g) was introduced to widen the receipts derived in relation to land that were to be included in a land owner's income wherethe land owner had allowed someone else to use the land.[38] In 1916, s 11(g) was replaced by s 85(e) of the Land and Income Tax Act 1916. This section is probably the true predecessor to the current provision. Section 85 was the section in the Act which defined the meaning of assessable income. It provided as follows:85. Without in any way limiting the meaning of the term, the assessable income of any person shall for the purposes of this Act be deemed to include, save so far as express provision is made in this Act to the contrary—11 At 739-740.(a) All profits or gains derived from any business;(b) All salaries, wages, or allowances (whether in cash or otherwise), including all sums received or receivable by way of bonus, gratuity, extra salary, or emolument of any kind, in respect of or in relation to the employment or service of the taxpayer;(c) All profits or gains derived from the sale or disposition of land or any interest therein, if the business of the taxpayer comprises dealing in such property, or if the property was acquired for the purpose of selling or otherwise disposing of it at a profit;(d) All profits or gains derived from the use or occupation of land, or the extraction, removal, or sale of minerals, timber, or flax, whether by the owner of land or by any other person;(e) All rents, royalties, fines, premiums, or other revenues (including payments for or in respect of the goodwill of any business, or the benefit of any statutory license or privilege) derived by the owner of land from any lease, license, or easement affecting the land, or from the grant of any right of taking the profits thereof;(f) All interest, dividends, annuities, and pensions;(g) Income derived from any other source whatsoever.[39] Section 85(e) is materially similar to the current s CC 1. Counsel agreed that subsection (e) was retained in broadly the same form in subsequent income tax enactments up to 2004 when it was replaced with s CC 1 of the Income Tax Act 2004 which defined income in terms identical to s CC 1 of the Income Tax Act 2007.[40] Mr McKay referred to the report of the Taxation Review Committee 1967Taxation in New Zealand (the "Ross Report") and noted that at Chapter 33 consideration was given to the predecessor to s CC 1. The report noted that premiums received on the grant of a lease were assessable under that section, but premiums received on the transfer of a lease were not.12 The report considered that while the form of transactions differed there is little if any difference in substance. It recommended the premiums received from the transfer should also be assessable to the recipient. It also recommended that such amounts should be deductible to the payer when incurred in the production of assessable income. The report's12 Report of the Taxation Review Committee [1967] Taxation in New Zealand (October 1967) at [503].recommendations were implemented only in part. The recommendation that amounts paid for the transfer of a lease should be assessable has never been acted upon. However, legislation was enacted permitting a deduction by a person paying an amount for the grant or transfer of a lease and also the grant or transfer of a licence. That lead to a position, Mr McKay submitted, where there was no symmetry or cohesion between the relevant provisions. That is because the lease transfer receipts continued to be non-assessable despite the fact that they were deductible to the payer and there was little, if any, difference in substance between a lease transfer receipt and a lease premium receipt, which was assessable. He noted that inconsistency remained as at the time the amounts which were questioned in this dispute were derived.[41] Mr McKay submitted that when officials realised this asymmetry they accepted the only way to change this was through specific legislative amendments. I do not intend to review what is proposed because it does not apply as at the date which is relevant to this dispute.[42] The parties also referred to the December 1989 report of the Consultative Committee on the Taxation of Income from Capital (the Valabh Committee report). Ms Courtney submitted that the objective of the review was to consider the manner in which income from capital was taxed, identify defects in the tax system and consider how the system could be reformed. The Committee identified forms of income that had traditionally not been considered to be taxable, but which had been made taxable by specific provisions of the Income Tax Act 1976, including"otherwise non-taxable payments under leases taxable under section 65(2)(g)". Withregard to s 65(2)(g) of the Income Tax Act, the predecessor to s CC 1(2), the Committee noted that:13As a general rule, New Zealand law does not include receipts for the sale ofgoodwill within the vendor's assessable income because such paymentswould normally be considered to be receipts on capital account. However, section 65(2)(g) includes within the definition of assessable income payments for or in respect of goodwill of any business, or the benefit of any statutory license or privilege, derived by the owner of land from any lease or13 Consultative Committee on the Taxation of Income from Capital, Consultative Document on the Taxation of Income from Capital (December 1989) at [2.4.7].similar interest affecting the land. The effect of this provision is to bring intoassessable income goodwill payments received on the lease of land Section 65(2)(g) is an attempt to avoid allowing taxpayers to transform lease payments (which would generally be taxable payments received on revenue account) into a non-taxable receipt received on capital account. For that reason, section 65(2)(g) includes in assessable income premiums as well as goodwill received by a lessor These provisions demonstrate how it has been found necessary to move the traditional capital/revenue boundary to hinder the ability of taxpayers to transform otherwise assessable income into income on capital account thatwould not be subject to tax [43] Mr McKay submitted that contrary to the Commissioner's submission, theValabh Committee report shows that only the capital amounts included in s CC 1 are those specifically listed in s CC 1(2). Mr McKay submits that s CC 1 applies to amounts that would be income under ordinary concepts, with some specifically enumerated exceptions, such as the inclusion of goodwill.Are the payments made under the agreement other revenues for the purposes of s CC1(2)(g) of the Income Tax Act 2007?[44] I provide a brief summary of each side's argument. Further discussion of the arguments will occur in the discussion section.Commissioner's position[45] The Commissioner's position is that s CC 1 is a specific legislative provision which taxes both income and capital in clear words. In the Commissioner'ssubmission, it does not matter whether the amounts at issue here are capital orincome, as the phrase "other revenues" in s CC 1(2)(g) captures both. TheCommissioner submits that this is clear from the statutory context, as some of the matters listed in s CC 1(2) have traditionally been held to be of a "capital" nature yetthe section makes them income. In the context of s CC 1(2), the ordinary meaning of revenue as being income, is displaced. She argues that the purpose of s CC 1 is to provide for the taxation of any income a person derives from any dealing with land, not constituting a disposal. The items in s CC 1(2) are payments relating to the use of land, rather than payments that are revenue by their nature.Vector's position[46] Vector's position aligns with the Commissioner's to an extent – the amount is capital, absent a special provision which treats those capital amounts as income.Vector differs from the Commissioner as it argues that "other revenues" does notcapture capital amounts and therefore s CC 1 does not apply in this case. Vectorsubmits "revenues" must be interpreted by giving effect to the plain meaning of theword itself. The fact that s CC 1(2) includes some amounts which have been traditionally regarded as capital does not change the meaning of that term. Contrary to the Commissioner, Vector submits that the ejusdem generis interpretation ruledoes not apply. The role of "other revenues", in Vector's submission, is to captureamounts of a revenue nature that might be derived from a lease, licence or easement without being specifically covered by the preceding words in s CC 1(2).Discussion[47] The question in this case is what does "other revenues" mean in s CC 1, andhow does that meaning apply to the facts of this case?[48] The plain meaning of "revenue" is "income".14 This is accepted between the parties.15 The fact that the word used in the subsection is the plural "revenues" doesnot change the position.16 Where the parties differ is over whether, in the context ofthis section, "other revenues" is intended to cover capital amounts. I accept thatParliament can tax capital amounts, so that if I were to find that the amounts at issue here are capital in nature, that does not of itself prevent s CC 1 applying. However, where Parliament intends to tax an amount of capital, it must use clear language to14 Lesley Brown (ed) The New shorter Oxford English dictionary on historical principles Volume 2(4th ed, Clarendon Press, Oxford, 1993) at 2579; Peter Spiller Butterworths New Zealand Law Dictionary (7th ed, LexisNexis, Wellington, 2011): "The general income received by the state intaxes". London, Midland and Scottish Rail Co v Anglo-Scottish Railways Assessment Authorityand London and North-Eastern Rail Co v Anglo-Scottish Railways Assessment Authority (1933) 50 TLR 130 (HL); Miller v Inland Revenue Commissioner (1966) 10 AITR 122 (SC); AA Finance Ltd v Commissioner of Inland Revenue (1994) 16 NZTC 11,383 (CA) at 11,391.15 The Commissioner does not argue that this is not the plain meaning, she argues that the plain meaning is displaced by the provision.16 Interpretation Act 1999, s 33.do so:17I think that counsel for the objectors are correct in submitting that wherever Parliament has intended to convert a form of capital gain into assessable income, clear and unmistakable language has been used for that purpose, e.g., s. 88 (1) (d) relating (inter alia) to premiums derived by the owner of land from a lease or payments for goodwill of a business. As Viscount Sumner observed in Levene v Commissioners of Inland Revenue [1938] A.C. 217; [1928] All ER Rep. 746: ". . . the subject ought to be told in statutory and plain terms when he is chargeable and when he is not" (ibid., 227; 751).[49] I reject the argument that the words "other revenues" do clearly andunmistakably tax capital, on their face. That argument is unsustainable given theaccepted plain and ordinary meaning of "revenue".[50] The list in s CC 1(2) does include items that have traditionally been regardedas capital. However, I do not consider that the Commissioner's argument that thismeans that "other revenues" clearly includes items of a capital nature, can succeed. To have to rely on other items in the list to divine the meaning of "other revenues"shows that the term itself is not clear enough to tax an amount of capital. This isillustrated by the inclusion of the word "premium" in the list. This has traditionally been considered to be a capital item, so its inclusion in what an "amount" is, whens CC 1(1) says "an amount described in subsection (2) is income" is a clear signalthat Parliament intends that capital item is to be taxed.18 "Other revenues" cannottax capital, using a term that has always been regarded as meaning income.Therefore "other revenues" can only mean other items not covered by s CC 1(2)(a) –(f), that are income in nature.[51] It follows that in rejecting the above argument, I also reject the submission that applying the ejusdem generis rule, all of the items in s CC 1(2) relate to the"use" of land and therefore "other revenues" can tax capital items. I reject that submission for the same reason, namely that if Parliament intends to tax capital it must do so with clear language. In my view, in these circumstances the application of the ejusdem generis rule is inconsistent with the general principle that Parliament17 Smith v Commissioner of Inland Revenue; Asher v Commissioner of Inland Revenue [1969] NZLR 565 (SC).18 Commissioner of Inland Revenue v Wattie [1999] 1 NZLR 529 (PC) at 538.must use clear language to tax an amount of capital. Additionally, I consider that the matters listed in s CC 1(2) are not all of the same class.[52] This meaning must then be cross-checked against purpose.[53] Section AA1 sets out the purpose of the Act as follows:AA 1 Purpose of ActThe main purpose of this Act are—(a) to define, and impose tax on, net income:(b) to impose obligations concerning tax:(c) to set out rules for calculating tax and for satisfying the obligations imposed.[54] That purpose is in line with New Zealand not having a general all purpose"capital gains" tax. An amount that would otherwise be capital (and non-taxable) isnot included in a person's income by the Act unless Parliament has intended that tobe so by a specific provision.[55] Context is relevant to purpose. I accept Vector's submission that treating "other revenues" as meaning any amount derived from a lease, licence or easementwould make s CC 1(2) redundant. Treating the term as having that meaning would,as Vector submits, mean that the section would be saying "an amount is income of the owner of the land if they derive the amount from a lease, licence or easement".The effect of this would be to make subsection two unnecessary. But the courts must give effect to the words Parliament has used.19[56] The wider context includes the newly enacted ss CC 1B and CC 1C:CC 1B Consideration for agreement to grant, renew, extend, or transfer leasehold estate or licenceWhen this section applies(1) This section applies when a person (the payee) derives an amount as consideration for the agreement by the payee to the grant, renewal, extension, or transfer of a right (the land right) that is a leasehold estate, or a19 Gordon: of the House of Israel v Sexton (HC Hamilton CIV-2006-419-1765, 15 December 2006 at [13].licence to use land.Exception for payment to holder by transferee(2) This section does not apply to an amount derived—(a) by the payee as the holder of a land right; and(b) as consideration for the transfer of the land right to the person paying the amount.Income(3) The amount is income of the payee.CC 1C Consideration for agreement to surrender leasehold estate or terminate licenceWhen this section applies(1) This section applies when—(a) a person (the payee) is the owner of—(i) an estate in land from which is granted a right (the land right) that is a leasehold estate not including a perpetual right of renewal, or is a licence to use land:(ii) the land right; and(b) derives an amount as consideration for the agreement by the payee to the surrender or termination of the land right.Income(2) The amount is income of the payee.[57] The Commissioner submitted that the enactment of these sections shows thats CC 1(2)(g) "other revenues" did cover these amounts prior to their enactment. Shealso conceded that their enactment could show the opposite. The latter is clearly the more compelling argument.[58] I conclude that "other revenues" is not intended to tax amounts of a capitalnature. It captures amounts that are income, but are not covered by s CC 1(2)(a) –(f). Whether s CC 1 applies in this case is therefore answered by determining whether the amounts at issue here are of a capital nature or are income.Principles on determining whether an amount is capital or income[59] The approach to be taken in determining whether payments are capital or income was set out by Lord Pearce in BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia (BP Australia) where he stated:20The 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 some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in borderline cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer:"Depends on what the expenditure is calculated to effect from apractical and business point of view rather than upon the juristic classification of the legal rights, if any, secured employed orexhausted in the process":per Dixon J in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634, 648. As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other; but those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallise particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.[60] In answering what the payments were calculated to effect from a practical and business point of view, the Court of Appeal in McKenzies extracted the following five indicia from the Privy Council's decision in BP Australia:21(i) the need or occasion which called for the expenditure;(ii) whether the payments were made from fixed or circulating capital;(iii) whether the payments were of a once and for all nature producing assets or advantages which were an enduring benefit;(iv) how the payment would be treated on ordinary principles of commercial accounting; and20 BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia [1966] AC 224 (PC) at 264–265, cited by the Privy Council in Commissioner of Inland Revenue v Wattie [1999] 1 NZRL 529 (PC) at 536 and by the Court of Appeal in Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988] 2 NZLR 736 at 740 and Commissioner of Inland Revenue v Thomas Borthwick & Sons (Australasia) Ltd (1992) 16 TRNZ 777 (CA) at 779.21 Commissioner of Inland Revenue v McKenzies (NZ) Ltd, above n 9.(v) whether the payments were expended on the business structure of the taxpayer or whether they were part of the process by which income was earned.[61] In uncomplicated cases, one or more factors may very clearly point to the expenditure being capital or revenue in nature and so recourse to all of these factors is unnecessary.22 However, in borderline cases, some factors will point to a finding of capital while others will point to the expenditure being capital. In such cases, the factors alone will not be determinative. Therefore it is necessary to analyse the facts as a whole and consider which factors carry the most weight in the light of the given facts.23Capital or income?[62] The Tunnel and the NSTC form part of Vector's electricity distributionnetwork. Vector derives its taxable income from the network structure. The payments from Transpower were therefore not part of the process by which income was earned by Vector.[63] Transpower paid Vector approximately $53 million in consideration of Vectoragreeing to grant the easement of rights and "thereby diminishing the physical capacity of the NSTC for Vector to utilise" (cl 6.1) and in consideration of Vectoragreeing to make available the Southern area for cables and equipment and "thereby diminishing the physical capacity of the Tunnel for Vector to utilise" (cl 6.3). Thepayments were made in lump sum amounts.24[64] The Tunnel and NSTC have capacity constraints which arise both from a physical and heat perspective. Vector served a brief from Mr NM Ellis. He is an electrical engineer employed by the plaintiff since March 2008. He has held a number of positions. They included initiating and leading the Vector NAaN Project22 At 741; Commissioner of Inland Revenue v LD Nathan & Company Ltd [1972] NZLR 109 (CA) at 214. .23 Commissioner of Inland Revenue v McKenzies (NZ) Ltd. above n 9 at 741.24 Whilst not a determinative factor, where a payment is made as lump sum there is an indication that the amount at issue is capital in nature: Commissioner of Inland Revenue v McKenzies (NZ) Ltd, above n 9.Delivery Team and collaborating the project and interface with Transpower. Hisbrief was served in support of the plaintiff's case.[65] The defendant filed a brief of evidence from Mr HE Orton. He is a registered professional engineer in the Province of British Columbia, Canada. He has operated a consulting engineering business as an underground cable specialist. He wasprovided with Mr Ellis' brief together with maps of the Tunnel and the agreement.[66] Both experts express views of the capacity of the Tunnel and the NSTC. I ordered a conference pursuant to r 9.44. The engineers met. With the assistance of counsel they extracted twenty-six questions from their respective briefs. The questions were about the capacity of the Tunnel and NSTC and whether afteraccommodating Transpower's cables and equipment, there would be space foradditional assets, infrastructure and equipment and ability to expand thermal capacity. The questions were also directed to the advantages and disadvantages of various methods which could be used to increase capacity and the possibility of solutions in the future. They produced a joint statement which provided their responses to the twenty-six questions. Counsel were in agreement that the twenty- six questions and the joint statement should be admitted as evidence and that the engineers would not then be formally called. I agreed with that approach and proceed on that basis.[67] It is not necessary that I record each question and answer. What is significant is the overall position which they conveyed. In that way there is an appreciation of the effect on Vector of the rights that it has transferred to Transpower. The engineers agreed that there were a number of factors that must be taken into account when considering how capacity of the Tunnel and the corridor could be increased. What comes through in their answers is that a study of the needs and available options must be undertaken on a project-by-project basis. That, understandably, requires a consideration of the cost viability of options. There was some disagreement as to the comparative costs of various possibilities. The position, however, is well summed up when one looks at the twenty-sixth question and the answer that the expert engineers provided to it. The question was:Whether the options suggested could only occur "at significant cost and in many cases, with a number of operational impacts".[68] The answers given in the joint statement to this question are as follows:1.50 Mr Ellis noted that he has no reason to change what was stated at para 3.13 of his reply brief; namely that he agreed with the options presented by Mr Orton, but for example, there would be, in Mr Ellis's view relative toVector, a high cost to retrofit if that was carried out before the end of life of the current cables. Mr Orton was of the view that there is a cost but not necessarily high relative to the total project costs. Mr Ellis agreed that the capacity of the Tunnel is not finite but will always be constrained by the presence of Transpower's cables in the Tunnel.1.51 There was discussion of the fact that Vector had agreed to accommodateTranspower's cables in the Tunnel and Mr Orton noted that they were aconstraint which was one of the factors that would need to be considered going forward: "you have to deal with what you agreed". Mr Orton noted that in respect of the comment that the options involved "significant" cost,some were less than others (for example water cooling as compared to HTS).1.52 After general discussion, it was agreed that the matter would ultimately need to be considered on a project-by-project basis taking into account theconstraints presently existing, ie including Transpower's cables.[69] I accept Vector's submission that it has effectively permanently given up part of its income producing asset in exchange for a lump sum payment. Both the Tunneland NSTC have capacity constraints as described above. Vector's agreement forTranspower to use the Tunnel and NSTC necessarily means that the capacity available for Vector's own use is restricted. The agreement terminates after 90 years,in 2101. The evidence was that the life of the Tunnel is expected to be less. The agreement contains exceptions set out in cl 16.2, which include cl 4.1 and 4.6(b). The easements in respect of the NSTC are to continue beyond the termination date. There is also a special provision in cl 16.13 of the agreement dealing with thesituation that could arise if Vector's rights for some reason were to terminate. Theseprovisions serve to emphasise the extent of the transfer of rights which are governed by the agreement. The Commissioner is correct that Vector has not legally disposed of its rights to those parts of the Tunnel and NSTC that are subject to the agreement.However, this is not necessary.25 Through the agreement, Vector's ability to use itsasset is effectively permanently impaired. The payments were of a once and for all nature producing advantages to Transpower which were enduring. This factor clearly points toward the expenditure being capital in nature.[70] The amounts are capital. Section CC 1 does not apply in this case. This finding is enough to dispose of the case. However, I will go on to briefly express myview on the issue of whether the payments were "derived from" a lease, licence or easement affecting Vector's land.Is the payment derived "from a lease, licence or easement affecting the land"for the purposes of s CC1(1(a)?[71] It is common ground that Vector continues to be the "owner of land" for thepurposes of s CC 1. For that reason, I analyse that position no further.[72] The agreement contains a no-merger clause at clause 22.8. In short, the provisions of the agreement do not merge, and are not extinguished, by the grant of the Southern Access Right or the grant or transfer of an interest in an easement in respect of either the Southern Access Right or the NSTC.[73] The plaintiff submits that s CC 1 requires the courts to have regard to the source or origin of the payment. The plaintiff's position is that there is a distinction between amounts derived from an item of property, eg rent from a lease, or a licence fee for a licence on the one hand, and amounts derived from the act of dealing with that property, eg a grant, a surrender, a transfer. Except for a lease, the plaintiff'ssubmission is that s CC1 is not concerned with amounts derived from that grant of a licence or easement. A lease is in a different position because the definition of lease in s YA1 includes a disposition that creates a lease.[74] The defendant's position is that the payment was made in exchange for thebundle of rights. In short, the submission is that money was received for and so25 Nethersole v Withers [1946] 1 All ER 711 (CA); Trustees of Earl Haig v Commissioner of Inland Revenue (1939) 22 TC 725; Inland Revenue Commissioners v John Lewis Properties Plc [2003] Ch 513 (CA) at 545."derived from" those rights. The rights are contained within the easements or licence as appropriate.[75] The defendant says that under clause 4.1(c) of the agreement, the plaintiff agreed to grant Transpower an easement over new freehold that the plaintiff owned which formed part of the NSTC. Under clause 4.6(a) of the agreement (and clause 2 of the Tunnel agreement) the plaintiff granted Transpower an access right to use the Tunnel for its cables. Clause 4.6(b) grants Transpower an easement over the Hobson Substation. The whole of the Southern consideration and at least part of the Northern consideration were therefore paid to the plaintiff for the grants of easements and a licence. If the payments had been for the grant of leases of land, the payments would have been considered as premiums derived from leases and so caught by s CC 1. The only question, says the defendant, is whether, because they are paid for the grant of easements or licences, the payments are not thereforederived "from" easements or licences.[76] The defendant further submits that the only time when payments for rights under easements are made is on a grant. The defendant submits that payments on the grant of an easement are what s CC 1 contemplates. The defendant submits thatmeans that the plaintiff, in fact, derived an amount "from" the licence to use the Tunnel and "from" the easement to use the NSTC.Discussion[77] I am concerned with easements and a licence, not a lease.[78] I do not accept that one can read "from" in this context as meaning "relating to" or "in relation to". The position can be contrasted by considering the Court of Appeal decision in Shell New Zealand Ltd v Commissioner of Inland Revenue where the Court had to consider payments made by Shell to its employees who were transferred in the course of their employment.26 The issue was whether thosecompensation payments were "in respect of, or in relation to, the employment" of theShell employee. The Court of Appeal found that they were because those words26 Shell New Zealand Ltd v Commissioner of Inland Revenue (1994) 16 NZTC 11,303 (CA).were "words of the widest import".27 Counsel for the taxpayer relied on the House of Lords decision in v Hochstrasser v Mayes.28 That involved a similar scheme. The taxpayer entered into a housing agreement with the employer under which he was paid compensation for loss on sale of his house upon being required to relocate. The issue was whether the compensation payment was in respect of an office oremployment "and were either profits or gains arising from which" or "profits whatsoever there from". The House of Lords held that the compensation payments were not derived from the office or employment. The New Zealand Court of Appeal distinguished the decision on the basis that the words are:29in our view, much narrower in scope than the words in our statute "in respect of or in relation to the employment".[79] The Southern consideration amount was received for Vector's agreement to grant a licence, that is the Southern Access Right to Transpower. The source of the amount was the agreement to grant the licence. That arises from clause 6.3 of the agreement between Vector and Transpower, which provides:In consideration of Vector agreeing to make available the Southern Area for Cables and Equipment and thereby diminishing the physical capacity ofthe Tunnel for Vector to utilise, the parties agree that Transpower shall pay to Vector the sum of $50,000,000 plus GST.[80] In Romanos Motels Ltd v Commissioner of Inland Revenue, the Court of Appeal had to consider s 88(1)(d) of the Land and Income Tax Act 1954, which provided as follows:30(1) Without in any way limiting the meaning of the term, the assessable income of any person shall for the purposes of this Act be deemed to include, save as far as express provision is made in this Act to thecontrary (d) All rents, fines, premiums, or other revenues (including payments for or in respect of the goodwill of any business, or the benefit of any statutory licence or privilege) derived by the owner of land from any lease, licence, or easement affecting the land, or from the grant of any right of taking the profits thereof.27 At 11,306.28 Hochstrasser v Mayes [1960] AC 376 (HL).29 Shell New Zealand Ltd, above n 26 at 11,306.30 Romanos Motels Ltd v Commissioner of Inland Revenue [1973] 1 NZLR 435 (CA).[81] The Court was required to determine whether a payment described as a payment of £5,000 made for the "goodwill and lease of the motels" in the agreement was a "premium or other revenue" within the section derived by the objector as theowner of land from a lease.[82] The Court of Appeal upheld the finding that the goodwill of the motels was"inseparably attached to the premises".31[83] The Court held:(i) "Derived from" does not necessarily mean "arising by virtue of some provision in a lease";32(ii) Something more is necessary than that the payment has been made as part of the transaction involving the grant of a lease;33(iii) There must be some real nexus between the grant of the lease and the payment of goodwill.34[84] Applying that test to the present case, the rights which are acquired under the easements and the licence are inseparable from the easements and the licence. The payment for those rights are derived from the licence or easements. I reject, as did the Court of Appeal, that there must be a reference to the payment in the licence or easement. Accordingly, if I were required to determine whether the payment was derived from the licence or the easements, I would find that it has been.Apportionment[85] The third issue, which does not need to be determined in this judgment, raised the question of whether there should be some apportionment if in fact a finding was made against the plaintiff in respect of the first two issues and in respect of the payment made relating to the NSTC payments. I do not determine this issue31 At 438.32 At 437.33 At 438.34 At 439.because I am not satisfied that an appropriate basis, even if apportionment was possible for assessing, how an apportionment should be made. The onus of proof is of course is on a taxpayer.35 I am not satisfied that that has been discharged. Had the outcome on the first issue been different, there may well have been justification for granting leave to address further submissions and evidence on this issue. In the circumstances, because it is not necessary, I simply advance this issue no further.Orders[86] I make orders:(i) Declaring that the payments made in respect of the Southern Access Right and for the Northern Easements do not constitute income under s CC 1 of the Income Tax Act 2007; and(ii) Cancelling the assessments.Costs[87] I reserve costs so that the parties can discuss same. In the event that there is no agreement, the party seeking an order for costs shall file and serve submissions in support, which shall be followed at 14 day intervals by submissions in oppositionand reply. The Case Officer shall refer counsel's memorandum to me when they arereceived.____________________JA Faire J35 Tax Administration Act 1994, s 149 A(2)(b).