Vector Limited v Commissioner of Inland Revenue

The tax case on a dispute of income or capital was decided in the High Court in August 2014. The court decided a payment of over 50 million paid by Trustpower to Vector is capital in nature thus treated as capital gain and non-taxable.

Case facts

Vector Ltd is an electricity distribution company. Their assets include the underground tunnel. Transpower managed and operates the national electricity grid in New Zealand. In order to maintain secure and stable electricity supply grid Trustpower offered to upgrade underground tunnel of Vector. In return Vector agreed to offer a 2/3 share in the underground tunnel to Trustpower, and Trustpower agreed to pay $53 million to receive this share.

Issue:

The issue in this case was whether payments of $53million made by Transpower to Vector in lieu of share in underground tunnel is income or not? Income tax on 53 million was at stake.

Tax laws

This case mainly looks at CC1 land of Income Tax Act 2007
Income
(1) An amount described in subsection (2) is income of the owner of land if they derive the amount from:
a. A lease, license, or easement affecting the land or
b. The grant of a right to take the profits of the land
Amounts
(2) The amounts are:
(g) Other revenues.

Commissioner’s position:

They refer to section CC1 (2)(g) as the phrase “other revenues” and claim that it does not matter whether the amounts are capital or income as it is other revenues of Vector. They also claim that the items in CC1 (2) are payments relating to the use of land rather than payments that are revenue by their nature.

Vector Ltd’s position:

“Other revenue” does not capture capital amounts and “revenue” must be integrated by giving effect to the plain meaning of the word.

Court decision

The payments made in respect of the Southern Access Right and for the Northern Easements do not constitute income under section CC1 of the Income Tax Act 2007

Discussion

• First, the court looked at CC1 (2)(g) “other revenue”. Both parties agree that revenue means income. Thus, “other revenues” cannot tax capital as it can only mean other items not covered by CC1 (2)(a) that are income in nature. There is no capital gain tax and if Parliament intends to tax capital, it must do so with clear language. Para [48] and [49]
• The court also rules that the payments from Transpower were not part of the process by which income was earned by Vector. The reason for it is because Vector entered the agreement to grant the easement of rights to Transpower and “thereby diminishing the physical capacity of the NSTC and the Tunnel for Vector to utilise”. Para [63]
• Vector has also effectively permanently given up part of its income producing asset in exchanging for a lump sum payment. The payment is capital in nature because the payments were of a once and for all nature producing advantages to Transpower which were enduring. Thus, section CC1 does not apply in this case. Para [69]
• Moreover, the rights which are acquired under the easements and the license are inseparable from the easements and the license. Para [84]

Reference- Vector Limited v Commissioner of Inland Revenue HC Auckland[2014] NZHC 2069