Where does our runway end? Land improvements and depreciation

Queenstown Airport Corp Limited v CIR [2016] NZHC 1299
The Commissioner refused to allow the Airport Corporation to take a depreciation deduction for the cost of constructing a “runway end safety area” (“RESA”) at Queenstown Airport. The RESA was constructed on an engineered and filled embankment which the Corporation constructed out from a cliff overlooking the Kawerau/Shotover River Delta. The RESA constructed on the embankment was to prevent aircraft careering off the runway in the event of a failed take-off or landing: they would sink into the covering and be brought to a halt.
Depreciation is available for the cost of aircraft runways but the High Court concluded that the RESA was not itself a runway, because a plane could not take off from or land on it. But it also held that the RESA could not be aggregated with the existing runway as part of a “runway system” approach. In short, if the RESA did not fulfil the fundamental requirement of supporting take-off and landing, then depreciation was not available for it.
To follow the Court’s reasoning it is necessary to review the legal treatment of land for depreciation purposes. The starting point is that land is not usually depreciated for tax purposes because it is not considered likely to lose value. It falls outside the definition of “depreciable property” in section EE 7(a) of the Income Tax Act, but certain specific improvements to land are added to the definition by section EE 6(1)(b) of the Act. These include “airport runways”, “hardstanding” and “roads”.
The High Court began by recognising that the embankment on which the RESA was constructed was by its engineering and fill “wrought into” the corporation’s land and so became land itself. That meant that it had to be brought within one of the exceptions for depreciable land improvements. It also meant that a distinction was drawn between the embankment below and the RESA above, as to which there is more below.
The approach the Court took to the exceptions was to avoid any suggestion that they might be expanded by analogy and to leave any apparent illogic in its decision to be dealt with by legislation. In the author’s view this is too restrictive an approach in that it seems to give no weight at all to the requirement that a functioning runway have the protection of a RESA. Instead of recognising the existence of a runway system, of which the RESA was undoubtedly part, the Court concluded that the depreciable improvement that Parliament had in mind was the “air strip”, ie the tarmac from which take-off and landing occurred.
The requirement of a RESA was imposed by regulations affecting civil aviation. It seems remarkable that Parliament would not have had in mind the possibility that land development might be required to reach future safety standards for airports and, therefore, to have contemplated the notion of an “airport runway” incorporating those developments when they had a direct relationship with the function of aircraft take-off and landing. In other words, the expression “airport runway” ought to be one which has enough elasticity to recognise instances where a workable runway is required to have some adjunct land improvement constructed adjacent to it, in order for it to function legally and safely.
To suggest that the RESA would not suffer the same degradation of the air strip missed the point. The Court noted that the grass covering on the RESA was considered to have an indefinite life span. But that assumes that no accident occurred which caused an aircraft to enter the RESA. Were that to occur, the RESA was designed to collapse and to bring the aircraft to a halt in soft ground. The degradation might not be gradual but if the event for which the RESA was constructed occurred, it would be extensive. Perhaps the Court considered that any repair would be deductible at that stage but ought not to be deducted in advance by way of depreciation.
The Court distinguished between the RESA and the embankment under it and said that even if the RESA was a depreciable improvement (contrary to its findings) the embankment could not be. That was because the exception from land related to buildings, fixtures and scheduled improvements only. The former all depended on underlying land yet that land was not brought into the depreciation regime, so the creation of the embankment was not considered to be depreciable even if the RESA might have been.
Dependence and connection of an improvement to land that is created below it, does not allow that land to be become part of that improvement. Instead the created land becomes part of the surrounding land to which it is contiguous and the improvement has to be considered separately. This is a decision which is directly relevant to matters such as port reclamations, which may be undertaken to provide for container hardstand (another exception from land), but whose tax treatment will be partitioned between depreciable and non-depreciable components: the hardstand itself and the reclaimed land respectively.
There are troubling aspects to this decision. Had the corporation been laying tarmac, it could have depreciated the cost, yet because it was providing a safety zone adjacent to the tarmac, as required for the safe and legal operation of the latter, it could not. That zone was constructed in a particular way to meet the safety requirements of being able to stop an aircraft and allow emergency access to it. It could be degraded immediately if an accident occurred and an aircraft entered the zone. None of this sounds like plain old “land” and it is disappointing that the Court did not consider that the words “airport runways” could be construed having regard to all that is encompassed within the notion of a safe runway being operated in accordance with the relevant regulations.
The decision may well have reflected the practical factor that a runway is used constantly during an airport’s operations and so will depreciate over time in a very clear way. The RESA might not be degraded in any way and God forbid that it should be. If depreciation is an allowance designed to permit a taxpayer to provide against the inevitability of capital wastage and the need for replacement (as opposed to periodic repair), then there was arguably only a slight possibility that the RESA would need to be replaced. That eventuality was arguably better dealt with for tax purposes by allowing a full deduction for repairs as and when they became necessary because of the highly unusual event of a failed take-off or landing.
© G D Clews, 2016                                 

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