Decision date: 12 November 2013
Case: TrustPower Limited v Commissioner of Inland Revenue
Act(s): Income Tax Act 2004
Keywords: Capital, revenue, resource consent, feasibility expenditure, asset
The High Court found that resource consents acquired for the purpose of constructing electricity generation projects were not stand-alone assets separate from the projects to which they related.
Resource consents obtained as part of a project, while possibly valuable as a bundle of rights, will not be stand-alone assets separable from the projects to which they relate.
While the Court found that the Commissioner of Inland Revenue ("the Commissioner") could not raise the land improvement point procedurally, it indicated that the Commissioner would have been unsuccessful on this point.
TrustPower is an electricity generator and retailer. It generates (by hydro or wind) approximately one-half of the electricity that it sells and buys the remainder.
TrustPower's approach to its generation is centred around the notion of the development pipeline, which has been set up by the company to give it flexibility in deciding which project it wishes to pursue at any given time. A project is developed along the pipeline, with a final commitment to go ahead with the construction of the project/power plant being made only when TrustPower deems the economic circumstances to be acceptable.
In the period between July 2005 and November 2007, TrustPower applied for, and obtained, consents ("the resource consents") in respect of four projects.
TrustPower refers to the resource consents obtained for the projects in the development pipeline as "Type 2" consents, to distinguish them from consents relating to existing property or plant (which are "Type 1" consents).
Each of the applications for the resource consents included an extensive "Assessment of Effects on the Environment" ("AEE"), pursuant to section 88(2) (b) and Schedule 4 of the Resource Management Act 1991.
TrustPower incurred approximately $17.7 million in expenditure in applying for and obtaining "Type 2" resource consents in the tax years ended 31 March 2006, 2007 and 2008.
Andrews J referred to the relevant case law (Case T53 (1998) 18 NZTC 8,404 (TRA), Milburn New Zealand Limited v CIR (2001) 20 NZTC 17,017 (HC), and ECC Quarries Limited v Watkis (Inspector of Quarries)  1WLR 1386 (ChD)) ("ECC Quarries"), which discussed as obiter the nature of resource consents and licences, and distinguished all three on the basis that the taxpayer in each scenario was committed to undertaking the operation for which the consents were required. Andrews J decided that these cases are ones involving what TrustPower described as "functional capital assets", and are akin to "Type 1" consents for existing operations. Further, as each of these cases found their respective consents to be inseparable from the business or land to which they relate, case law supported the conclusion that the resource consents in this case cannot be seen as separate assets.
Andrews J also accepted TrustPower's evidence that the resource consents provided no independent value to TrustPower.
Andrews J concluded that the resource consents obtained by TrustPower with respect to the four projects were not stand-alone assets, separate from the projects to which they relate. The expenditure incurred in obtaining them must, therefore, be treated in the same manner as the projects (ie, as feasibility expenditure on revenue account).
Although the decision on the above issue was enough for Andrews J to decide the case in favour of TrustPower, her Honour considered the BP Australia indicia in order to determine, whether, if the resource consents were separate assets, they were capital or revenue assets.
Andrews J accepted that the purpose or occasion for the expenditure was not solely or principally to obtain resource consents. The expenditure was incurred as part of TrustPower's investigation into the feasibility of the projects to define the parameters of possible projects, and to enable an assessment of possible projects against TrustPower's other options for sourcing electricity to sell to customers.
Andrews J found that this aspect points to the expenditure being on revenue rather than capital account.
Andrews J did not find the fixed/circulating capital test useful in this case for two reasons:
Andrews J stated that she considered this test within the context of TrustPower's development pipeline.
Andrews J accepted TrustPower's submissions that most of the expenditure was not primarily directed at obtaining the resource consents, but was to assess the feasibility of the projects and so was recurrent in nature, being continually incurred to investigate and define the feasibility of the various projects.
Andrews J referred to the case of Commissioner of Taxation v Ampol Exploration Ltd (1986) 13 FCR 545 to support her conclusion that this aspect of the test indicates that the expenditure was of a revenue nature.
Although Andrews J accepted TrustPower's submission that there is an inherent uncertainty surrounding the terms and duration of resource consents, and whether projects will be progressed further, the consents last for a significant period, and therefore provide an enduring benefit.
Andrews J found that this aspect indicates that the expenditure incurred in obtaining resource consents should be regarded as capital rather than revenue expenditure.
Expert evidence on accounting standards was called by both parties. The experts focussed on two New Zealand Equivalent to International Accounting Standards ("NZIAS") standards: NZIAS 16 - Property, Plant and Equipment and NZIAS 38 - Intangible Assets.
For the purposes of this discussion, Andrews J found that if the resource consents are stand-alone assets (contrary to her earlier finding), they could only be intangible assets. As such, it is doubtful that NZIAS 16 would apply.
Andrews J concluded that while an offer was made to purchase one of the projects, including the resource consents, TrustPower did not apply for the consents with the intention of selling them. Further, in the light of TrustPower's evidence that there were always more projects in the development pipeline than it had the financial and resource capability to construct, TrustPower could not have demonstrated the availability of adequate technical, financial, or other resources to complete the projects and use the resource consents.
On this basis, under NZIAS 38, the expenditure would not be recognisable as capital and would properly be treated as revenue.
Andrews J accepted TrustPower's submission that the consents are not means by which TrustPower can produce income, in the absence of a commitment to proceed to construct the project concerned. Although the consents were necessary for the project to be constructed, they did not generate any electricity, and they did not create any income for TrustPower.
Andrews J was satisfied that, even if the resource consents were separate assets, they could not be regarded as part of TrustPower's business structure. Andrews J concluded that this aspect indicated that the resource consents should be found to be revenue assets.
Andrews J concluded that, even if the resource consents were stand-alone assets, from a business and practical point of view, they were revenue assets, and the expenditure to obtain them was revenue in nature.
TrustPower did not use the resource consents in the tax years concerned, and did not generate any income from the consents. Andrews J accepted that the resource consents were of value to TrustPower only as part of a "bundle", "package", or "suite" of rights, and as part of the development pipeline, which itself is only one part of TrustPower's business development.
Andrews J found that TrustPower's expenditure incurred in obtaining the resource consents was incurred as part of the feasibility process and was, therefore, revenue in nature.
The Commissioner submitted that the resource consents provided TrustPower with the rights to construct and operate power plants on the land, and thereby improved the functionality of the land. The Commissioner referred to ECC Quarries as authority for the proposition that expenditure incurred to obtain planning permission to improve the functionality of land (ie, a capital asset) is capital.
Andrews J found that the present case is distinguishable from the situation in ECC Quarries where the planning permission could not, by law, be transferred.
Andrews J concluded that if she was required to consider the Commissioner's argument, that the resource consents enhanced the value of the underlying land and were therefore capital, she would find against the Commissioner.
The Commissioner has appealed this decision and she will continue to apply her view of the law in the interim.