No intangible property in released restriction
Anzco Foods Limited v CIR  NZHC 1015
This High Court decision has considered the core elements of depreciable intangible property and reminded taxpayers and their advisors of the need to carefully construe the terms of a transaction before assuming the tax outcomes.
The case concerned land which had been sold by a freezing works company, AFFCO, subject to a condition that it not be used for the slaughter of livestock or meat processing for a period of 20 years. The purchaser then sold the land to a subsidiary company of ANZCO Foods, which wanted to use the land for the prohibited purpose.
AFFCO sought to enforce the prohibition and the resulting case was settled on the basis that ANZCO paid a sum for the encumbrance on the land, which secured the prohibition as to use, to be removed. The dispute between the company and the Commissioner was over the tax treatment of the expenditure outlaid to remove the encumbrance and in particular whether a depreciation claim was available for it.
The taxpayer treated the outlay as expenditure on purchasing the right to apply the land in the previously prohibited use for the remaining life of the encumbrance. It treated this as depreciable intangible property for which there was a depreciation claim, effectively amortising the cost of removing the encumbrance over its remaining life.
The High Court (Mander J) rejected this analysis and reinforced the view that the tax outcomes of a transaction depend on the terms of the relevant contracts, unless there were misdescriptions. In this case the Court concluded that, rather than purchasing a right to use the land, the company’s outlay was to remove a restriction on the right to use land, which was not legally the same thing.
The taxpayer argued that it acquired a chose in action in terms of the right to use the land in the desired activity but the Judge considered that the only chose in existence was that which rested with AFFCO, ie the right to enforce the original restriction on use. That chose was extinguished by the deal to release the encumbrance but that did not confer a chose as such on ANZCO. It simply had its rights as owner.
The Court usefully reviewed the policy underlying the regime for depreciable intangible property and noted that it was intended to apply to rights that are distinguishable from those which are inherent in ownership of the thing from which the right arises. In this case ANZCO had been relieved of an impediment to use, which meant that its rights of ownership were no longer encumbered but there was no separate subordinate property, having a value over a known and fixed life (the company’s rights of ownership were indefinite) that was created by the expenditure which the company outlaid.
The approach taken by the company seems to have been based on the view that it was acquiring something more than it had previously owned, almost as though the right to use the land in meat processing was grafted onto the right to use the land for any other purpose, which was the result of the original purchase. That may well have been an available economic analysis of what the company was doing, but the enhancement of its capital asset was not by way of acquiring new rights as much as paying for the release of restrictions. The purchase of land per se would not normally be depreciable (though buildings erected on land could be). Considered in that light, one would not really expect that an improvement in the value of non-depreciable land by the release of a prohibition as to its use would give rise to a separate entitlement to depreciation, when the underlying asset would not. It might have been different if the amount outlaid could be attributed to the value of any buildings on the land whose use was less restricted and whose value was increased as a result. That seems not to have been argued and no evidence of apportionment to building value seems to have been led (perhaps it could not be). Instead the taxpayer attempted to make a separate depreciation claim based on what the Court considered was a flawed construction of the relevant transaction.
© G D Clews, 2016