Easing up on easements
An easement gives a person the right to use another person’s land in a particular way, or to prevent that other person from using their land in a particular way. Historically, amounts received by a landowner to grant an easement have been treated as taxable under section CC 1 of the Income Tax Act 2007. This has been somewhat illogical, because granting an easement typically reduces the value of land and if the sale of land would be non-taxable, it makes sense that a payment for an easement should also be non-taxable.
The tax treatment of easements is now in a state of change for the following two reasons.
Firstly, looking forward, new legislation has been passed that will treat one-off easement receipts as non-taxable from 1 April 2015. Secondly, looking backward, a recent High Court decision has cast doubt over how CC 1, should be interpreted. The case involved a $3 million payment by Transpower New Zealand Limited (Transpower) to Vector Limited (Vector) for an easement so that Transpower could complete an upgrade by accessing Vector’s land.
Vector asserted the easement was non-taxable, however the IRD reviewed the situation and disagreed. Both sides did agree that the payments related to land, and were capital in nature. But Vector took the view that the phrase “other revenues” refers to amounts of a revenue nature. But the IRD argued that it was clear from the legislation that the phrase ‘other revenues’ was intended to capture both income and capital receipts.
The High Court rejected the IRD’s argument and found in favour of Vector, stating that the ordinary meaning of ‘revenue’ is income, and that capital receipts are not captured under the term “other revenues”. They also concluded that the legislation only taxes capital amounts where they are explicitly listed. In addition, the Court also found the nature of the payments to be capital on the basis that the payments were not part of Vector’s ordinary income earning process, and their ability to use its assets was permanently impaired.
Emphasis was placed on the importance of the principles of statutory interpretation. This was emphasised by the Court’s comment: “if Parliament intends to tax capital it must do so with clear language”.
The case represents a significant change of treatment. It also opens the door for taxpayers to request re-assessments (and tax refunds) of past tax returns in which easements have been treated as taxable. How the IRD would view requests like this is uncertain at this stage because it has not commented on the case yet. But if easements have been treated as taxable, there is a potential opportunity for the tax paid to be reassessed.