TRUSTPOWER LIMITED v THE COMMISSIONER OF INLAND REVENUE [2013] NZHC 2970 [12

November 2013 ]

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV 2011-404-007140

[2013] NZHC 2970

UNDER

the Taxation Administration Act 1994

IN THE MATTER

of the Income Tax Act 2004

BETWEEN

TRUSTPOWER LIMITED

Plaintiff

AND

THE COMMISSIONER OF INLAND

REVENUE

Defendant

Hearing:

12-30 August 2013

Appearances:

G J Harley, S Armstrong, L Hablous and A F Church for

Plaintiff

D H McLellan QC, M Andrews, R Roff and C Kern for

Defendant

Judgment:

12 November 2013 at 10am

(RESERVED) JUDGMENT OF ANDREWS J

This judgment is delivered by me on 12 November 2013 at 10am

pursuant to r 11.5 of the High Court Rules.

.....................................................

Registrar / Deputy Registrar

Solicitors/Counsel: Russell McVeagh, Auckland G J Harley, Barrister, Wellington D H McLellan QC, Barrister, Auckland Crown Law, Wellington Inland Revenue Department, Wellington

Table of Contents Introduction .......................................................................................................... [1] A history of the dispute ........................................................................................ [7] The development pipeline in more detail – feasibility investigation .............. [16]

What are the issues? The pleadings ....................................................................................................... [30]

Matters not pleaded .............................................................................................. [35] Issues emerging in closing submissions ............................................................... [41] The “general permission” and the “capital limitation” .................................. [42] The capital/revenue determination: overview of leading authorities ............ [44] The practical and business point of view – the BP Australia indicia ................... [48]

The “identifiable asset” test................................................................................. [51] Further New Zealand authorities ......................................................................... [52]

Resource consents and the Income Tax Act Resource consents ................................................................................................ [57] Resource consents in the context of the Income Tax Act ...................................... [62] Submissions as to the statutory context ................................................................ [66] Discussion ............................................................................................................ [70]

Are the resource consents obtained by TrustPower, on a stand-alone

basis, assets? Introduction .......................................................................................................... [80] Submissions .......................................................................................................... [87]

Discussion ............................................................................................................ [92]

The BP Australia indicia .................................................................................... [98]

What was the need or occasion which called for the expenditure? ..................... [99] Were the payments made from fixed or circulating capital? .............................. [104]

Was the expenditure of a once and for all nature producing assets or

advantages which were of an enduring benefit for TrustPower? ....................... [111] (a) Was the expenditure of a once and for all or recurrent nature? ................. [113]

(b) Were the assets or advantages produced of an enduring benefit to

TrustPower? ............................................................................................... [119]

How would the payment be treated on ordinary principles of commercial

accounting? ........................................................................................................ [126] Was the expenditure incurred on the business structure of TrustPower,

or as part of the process by which income was earned? .................................... [135] From a practical and business point of view, is the expenditure to be

regarded as capital or revenue in nature? ......................................................... [139]

Was TrustPower’s expenditure in obtaining resource consent incurred

for the purposes of improving its interest in the underlying land? Introduction ........................................................................................................ [142] Discussion .......................................................................................................... [146]

TrustPower’s alternative argument: classification of expenditure Introduction ........................................................................................................ [148] When was TrustPower committed to filing applications for resource

consents? ............................................................................................................ [151]

Discussion .......................................................................................................... [154] Result ................................................................................................................. [157]

Appendix

The four projects: description and chronology 1. Arnold hydro

2. Kaiwera Downs wind farm 3. Mahinerangi wind farm 4. Wairau River Hydro

Introduction

[1] The plaintiff, TrustPower, derives its business income from selling electricity.

It generates (by hydro or wind) approximately one-half of the electricity that it sells

and buys the remainder. TrustPower is New Zealand’s fourth largest retailer, and

fifth largest generator, of electricity.

[2] TrustPower seeks to maintain flexibility as to whether it generates or buys

electricity, as circumstances change. To this end, it has developed a “pipeline” of

generation projects, which it refers to as “the development pipeline”, “the optionality

pipeline”, or “the pipeline”. The pipeline is intended to provide TrustPower with

information as to the viability, feasibility, and costs of building new generation

capacity, to be used when it makes decisions as to how it sources the electricity it

sells.

[3] The development pipeline comprises a number of possible wind or hydro

generation projects, which are at various stages of the feasibility assessment.1 There

are always more projects in the pipeline than TrustPower has the financial or

resource capability to construct, or are needed to supply its customers. Nevertheless,

TrustPower considers the pipeline to be essential, to provide sufficient detailed and

robust information on which it can assess the relative merits of whether to “build” or

“buy”. TrustPower describes the development pipeline as providing it with a suite of

options as to whether to build generation capacity, or buy electricity to sell.

[4] Some projects are progressed through the pipeline to the stage of applying for

various consents (for example, land use consents, water permits, and discharge

permits) under the Resource Management Act 1991 (“the RMA”). In the period

between July 2005 and November 2007, TrustPower applied for, and obtained,

consents (“the resource consents”) in respect of four projects: Arnold River hydro on

the west coast of the South Island (“Arnold”), Kaiwera Downs wind farm, east of

Gore, Southland (“Kaiwera Downs”), Mahinerangi wind farm, west of Dunedin

(“Mahinerangi”), and Wairau River hydro, in Marlborough (“Wairau”). TrustPower

refers to resource consents obtained for projects in the development pipeline as

1 At any time there are approximately 200 projects in the development pipeline.

“Type 2” consents, to distinguish them from consents relating to existing property or

plant (which are “Type 1” consents). Each of the applications for resource consents

included an extensive “Assessment of Effects on the Environment” (“AEE”),

pursuant to s 88 (2) (b) and Schedule 4 of the RMA.

[5] The primary dispute between TrustPower and the Commissioner of Inland

Revenue (“the Commissioner”) is as to the nature of the expenditure (of

approximately $17.7 million) TrustPower incurred in applying for and obtaining the

“Type 2” resource consents in the tax years ending 31 March 2006, 2007, and 2008.2

TrustPower contends that it applied for the resource consents as part of its feasibility

analysis of each project, and before it had committed to the construction of any of

the projects. For that reason, TrustPower submits that the expenditure is revenue

expenditure, incurred in the course of deriving income from the generation and sale

of electricity, and therefore deductible for tax purposes. The Commissioner contends

that the resource consents are themselves intangible capital assets, and that from the

time TrustPower was committed to applying for the consents, the expenditure

incurred in obtaining them is capital expenditure, and therefore not deductible.

[6] If the expenditure is held to be capital, then two secondary issues arise: first,

at what time the expenditure ceased to be “revenue” and became “capital” in nature,

and secondly, whether (after that point) the Commissioner correctly allocated

particular expenditure as capital rather than revenue.

A history of the dispute

[7] TrustPower claimed that its expenditure in respect of each of the proposed

Arnold, Kaiwera Downs, Mahinerangi, and Wairau projects was deductible as

“feasibility expenditure” pursuant to the “general permission” in s DA 1(1) of the

Income Tax Act 2004 (“the ITA 2004”).3 On 31 March 2010 (for Arnold,

Mahinerangi, and Wairau) and 22 June 2010 (for Kaiwera Downs) the Commissioner

2 The exact figure in dispute was agreed between the parties to be $17,672,290 (as noted in a

schedule provided to the Court on 30 August 2013). TrustPower does not claim that expenditure

relating to its “Type 1” consents is revenue in nature. 3 The Income Tax Act 2004 applies in this case rather than its replacement, the Income Tax Act

2007.

issued Notices of Proposed Adjustments disallowing the deductions for the tax years

ending 31 March 2006, 2007, and 2008.

[8] The reason given by the Commissioner for disallowing the deductions was

that the expenditure was capital in nature, because it was incurred for the purpose of

developing and acquiring a capital asset, namely, the four proposed projects.

Expenditure that is of a capital nature cannot be deducted, pursuant to s DA 2(1) of

the ITA 2004 (“the capital limitation”).

[9] TrustPower then began the challenge procedures pursuant to s 138B(1) of the

Tax Administration Act 1994. The dispute was referred to the adjudication unit of

Inland Revenue. At the time the adjudication unit was considering the matter, the

time bar for the 2006 year was due to expire on 31 March 2011. The adjudication

unit was not able to give a decision within time, notwithstanding an extension by

agreement. The assessment for the 2006 tax year was therefore returned to Inland

Revenue’s service delivery group.

[10] On 28 September 2011, the Commissioner issued an amended assessment for

the 2006 tax year, disallowing TrustPower’s claimed deductions for feasibility

expenditure for that year.

[11] On 17 October 2011, the adjudication unit issued a report in respect of the

2007 and 2008 tax years (“the adjudication decision”). The adjudication unit

decided that, because TrustPower had not committed to proceed with the acquisition

or development of any of the proposed projects (in that the Board had not made a

formal documented decision to proceed) in any of the relevant tax years, the

expenditure was not capital in nature. Rather, it was feasibility expenditure, incurred

in order to “weigh up” whether to proceed with the project.

[12] Despite determining that, when considered within the projects to which they

related, the resource consents were part of the feasibility expenditure, the

adjudication unit went on to consider whether the resource consents were stand-

alone assets and, if so, whether they were capital or revenue assets. It concluded that

the resource consents could be either capital or revenue assets, depending on the

facts, but would in most cases be capital. The adjudication unit was not able to

determine which consents were of a capital nature, and was not able to allocate costs

between “mere feasibility expenditure” and “what constitutes the cost of the capital

assets”. The dispute was therefore returned to the service delivery group “to make

necessary adjustments resulting from the above conclusions”.

[13] On 29 March 2012, the Commissioner issued a “re-assessment letter”. The

Commissioner said that the resource consents for the four projects were “long life

consents”, and therefore would provide an enduring benefit to TrustPower. As such,

the Commissioner said, they are capital assets and the costs incurred in obtaining

them are of a capital nature. The Commissioner also said that from the time

TrustPower commenced the resource consent process for a particular project, any

costs incurred for the purpose of obtaining resource consents (as part of that process)

were properly treated as resource consent costs of a capital nature rather than as

feasibility costs.

[14] The Commissioner concluded that expenditure of approximately $17.7

million associated with resource consent applications during the 2006, 2007, and

2008 tax years was capital in nature. The deductions claimed by TrustPower were

therefore disallowed.

[15] TrustPower issued this proceeding on 8 November 2011, challenging the

Commissioner’s amended assessment in respect of the 2006 tax year, only.

Following the receipt of the re-assessment for the 2007 and 2008 tax years,

TrustPower filed an amended statement of claim on 25 May 2012, which challenges

the Commissioner’s re-assessment in respect of each of the 2006, 2007, and 2008 tax

years.

The development pipeline in more detail – feasibility investigation

[16] In his evidence for TrustPower, Dr Harker, Chairman of the TrustPower

Board of Directors, said that the pipeline of generation projects was developed to

enable TrustPower to develop new generation projects as and when profitable. Dr

Harker referred to a “Generation Development Plan” presented to the Board in

October 2002, which summarised the pipeline approach:

TrustPower Limited has identified a number of generation project

opportunities both related to the enhancement of existing assets and green

field projects with potential for generation and associated infrastructure

development. The Board of TrustPower wishes to progress some of the

viable opportunities into robust business cases for development by the

company or for sale.

The following report identifies the key development objectives, outlines the

strategy for establishing and maintaining a project pipeline, presents the

current project portfolio and a timebound action plan for progressing

selected concepts into business cases.

[17] After setting out the “key drivers” of generation development (creating

shareholder wealth, progressing projects which are economically, socially, and

environmentally sustainable, and the efficient use of resources to optimise returns),

the Plan sets out a “development strategy”, beginning with the comment:

To achieve our goal, we need to develop and maintain a healthy concept to

implementation project pipeline. We estimate that about 3 concepts out of

10 will pass the financial and economic hurdles and progress into the

feasibility stage, and only 2 or 3 of the fully appraised projects would gain

resource and land use consents and approvals required for implementation.

[18] In his evidence for TrustPower Mr Kedian, who was General Manager,

Generation at TrustPower, and responsible for overview and management of the

development pipeline from 2005 to 2011, said that the pipeline:

... consists of potential development generation projects, all at different

stages in TrustPower’s feasibility process (a significant number of them are

subsequently eliminated). Projects remain in the pipeline from the time the

project is identified until a decision is made by TrustPower’s Board to

commit either to construction of the generation scheme or to abandon the

project. ...

[19] Projects in the development pipeline are assessed through a three-step

feasibility process. The first step involves the identification of potential generation

sites and a high-level evaluation of the feasibility of this site. There are three stages

within the first step. The first stage involves identifying and evaluating potential

sites (a “desktop” exercise undertaken in-house at TrustPower) and commencing

discussions with affected landowners, with a view to obtaining agreements for access

for investigation and monitoring, and option agreements (preferably by way of

easements) in respect of future use of the land, should the project proceed to

construction. TrustPower may also consider purchasing land.

[20] The second stage of the first feasibility step involves on-site monitoring and

undertaking a high-level evaluation, to determine whether the particular project

should proceed to applications for resource consents. For the purpose of this

evaluation, TrustPower “guesstimate[s]” the cost of the project, because at this stage

no detailed geotechnical analysis of the site has been undertaken, and no detailed

design work done.

[21] The third and final stage of the first feasibility step, if a project passes the

high-level evaluation, and if it is concluded that the project (as currently envisaged)

is likely to be economically viable, is applying for resource consents. In respect of

this stage, Mr Kedian said:

3.16 The third stage of the first step feasibility process is the RMA

consent application. RMA consent is necessary before a decision can be

made to proceed with the second step feasibility study, being an evaluation

of what can be constructed, in terms of the consented project. This enables

TrustPower to analyse comprehensibly the viability of the project in its

second step process, which contemplates detailed design and costing, so as

to be able to commence the preparation of the business case for the

construction of a project.

3.17 There are two aspects to this RMA consent preparation stage of the

first step feasibility analysis. First, no project can proceed to construction

without RMA consent. Secondly, until TrustPower has RMA consent, it

does not know what it can construct or what limitations will be placed on the

scheme operation and therefore cannot determine whether the project is

viable. ... Although detailed and specific in their own terms and framework,

the RMA consents do not enable TrustPower to say “let’s go ahead and build

this”. At this time, these RMA consents reflect only in part what is a

preliminary design concept. I would estimate that at the point of making the

relevant application, engineering design would be about 10% complete. This

point is fundamental and requires some understanding of the engineering and

design complexity of the four projects.

...

3.19 TrustPower engages external experts to carry out analysis of issues

such as the impact on birds, native flora and fauna, and the noise and visual

impact of the proposed project. These studies are essential to TrustPower’s

assessment of whether the project is feasible, irrespective of the RMA

requirements. However, TrustPower also knows that these things may

subsequently impact its ability to obtain RMA consent. The project ideas

start out as purely engineering concepts without any consideration of the

RMA requirements in relation to the effects on the environment or the

community. It therefore requires each external consultant to complete a

“fatal flaw” analysis in order to identify up front any issues that will make

the project impossible to undertake. This occurs at an early stage in the

process, before a firm decision has been made to proceed with an application

for RMA consent. If there are no fatal flaws identified, the external

consultants will continue their work (alongside the other continuing work

streams) and this may all eventually form part of an application for RMA

consent.

[22] Mr Kedian further said that the “Type 2” resource consents “provide what is

the outside ‘shape of the envelope’”, for a project and “the particular resource

consent terms provide some of the relevant parameters”. He went on to say that the

resource consent terms are “no more useful than the wind or hydro data set. Each is

a critical component in the whole picture, but it is the whole picture that is defined in

the second step feasibility analysis.”

[23] The second step of the feasibility process, which is not undertaken until

resource consents are granted, involves the development of all the identified

components within the “envelope”. The second step feasibility work includes

developing the necessary civil engineering and electromechanical designs, calling for

tenders from (but not committing to) manufacturers and construction companies,

analysing how the scheme will be connected to the national grid or a local network,

and analysing the economic feasibility of the project.

[24] The third step of the feasibility process, if the project is considered viable

after the second feasibility step, is the preparation of a business case for

consideration by the Board, in which a recommendation is made to the Board as to

whether the project should proceed to construction, and a capital expenditure budget

approved.

[25] The fact that a generation project is in the development pipeline does not

mean that it will ultimately be constructed. Dr Harker said in evidence that

TrustPower will “postpone its own developments when it is cheaper to purchase and

this postponement can be ongoing”. Purchasing may be the better option, for

example, if other competitors have better new-build options than TrustPower has, or

if other generators or retailers have cheaper electricity available from over-supply.

Against that, reliance on purchasing electricity from other sources carries risks,

which can be minimised if TrustPower has the ability to increase its generation

capacity within a reasonably short period of time.

[26] Dr Harker’s evidence was that “the intention of the development pipeline is

to provide TrustPower with development options that can be weighed up against

other options”. He said:

Development options in the pipeline are just options that enable good

decisions about the source of supply to be made. Put another way,

TrustPower is investing in a “chance” with these projects. While over the

next 20 to 30 years it is possible that all projects in TrustPower’s pipeline

could be built, I can say with confidence that they will not all be built by

TrustPower in the next 10 years. TrustPower will only pursue the “build”

option and progress a project in its development pipeline, where it is

confident that this is a better use of its funds than sourcing supply through

the “buy” option. However, options in the pipeline that may not be

considered to be worthwhile at a particular time help TrustPower assess the

merits and value of either not seeking to increase sales, or meeting existing

or new demands from other wholesale sources.

[27] A key factor in assessing the viability of any project in the development

pipeline is the impact of “HVDC charges”. The HVDC (high voltage direct current)

power line is more commonly known as the “Cook Strait cable”, and links the North

and South island high voltage transmission systems (“the national grid”). A charge is

imposed on South Island generators injecting electricity into the national grid. The

charge can only be avoided if, rather than being injected into the national grid,

electricity from South Island generation is embedded directly into a local distribution

network. Mr Kedian’s evidence was that the HVDC charge has a fundamental effect

on the economics of projects in the development pipeline.

[28] Mr Kedian reported to the TrustPower Board each month on projects in the

development pipeline. A table setting out the pipeline was included in the Agenda

papers. The Table was divided into five sections, reflecting the stage projects had

reached in the development pipeline: “In Final Design/Construction Planning

Phase”, “In Consenting/Engineering Design Phase”, “Land Access/Scoping Phase”,

“Preliminary Investigation Phase”, and “Prospect Parked”.

[29] Chronologies of progress of each of the four projects are set out in the

Appendix to this judgment. The chronologies were derived from an agreed

chronology provided by the parties, and documents in the agreed bundle of

documents.

What are the issues?

The pleadings

[30] In the Amended Statement of Defence to TrustPower’s Amended Statement

of Claim, the Commissioner put in issue (by denying or asserting having no

knowledge of allegations) the majority of TrustPower’s allegations. The

Commissioner also made affirmative allegations in respect of many of TrustPower’s

allegations.

[31] In his submissions for TrustPower, Mr Harley criticised the Commissioner’s

pleading as being, in various respects, unresponsive to TrustPower’s allegations,

factually incorrect or misleading, and contrary to the matters and determinations set

out in the adjudication decision. Mr Harley’s objections are noted. TrustPower’s

position on these matters has been made clear in its reply to the Amended Statement

of Defence,4 and in the evidence and submissions for TrustPower.

[32] Mr Harley referred, in particular, to the Commissioner’s pleading in response

to TrustPower’s allegation (at paragraph 9 of the Amended Statement of Claim) of its

three-step feasibility analysis for potential new generation projects. At paragraph 9

of the Amended Statement of Defence, the Commissioner denies the “three-step”

characterisation of the feasibility analysis, and affirmatively alleges that

TrustPower’s process for analysing and developing potential new electricity

generation projects involved a “four phase, 24 step” process. Mr Harley submitted

that this was contrary to the adjudication unit’s acceptance, in the adjudication

decision, of TrustPower’s characterisation of the feasibility analysis process.

[33] Witnesses for TrustPower, Dr Harker, Mr Kedian, and Mr Campbell, all gave

evidence of the three-step feasibility analysis process. Their characterisation of the

process was not challenged on behalf of the Commissioner, and no evidence was

given for the Commissioner in support of the alleged four phase 24 step process.

4 Dated 10 July 2012, but incorrectly titled “Defendant’s Amended Statement of Reply to

Plaintiff’s Amended Statement of Defence”.

[34] While the role and significance of applications for resource consents is an

issue for determination, I have concluded that there is no real issue as to

TrustPower’s characterisation of the feasibility analysis process. If I am wrong in

that conclusion, then I accept TrustPower’s characterisation of the three-step process

and reject the Commissioner’s alleged four phase 24 step process.

Matters not pleaded

[35] Mr Harley also objected to the Commissioner having, through various

witnesses who gave evidence for the Commissioner, put in issue a number of factual

issues and propositions which were not raised in the pleadings. Again, while the

objection is noted, TrustPower had the opportunity to, and did, file reply evidence,

and the “new” issues were canvassed at the hearing.

[36] Two particular matters raised at the hearing (but not pleaded) must be

mentioned. First, expert evidence was given for the Commissioner to the effect that

TrustPower’s accounting treatment of the expenditure at issue in this proceeding was

inaccurate, and that its financial statements were materially mis-stated and wrong.

TrustPower called expert evidence in reply. I accept Mr Harley’s submission that the

Commissioner’s evidence as to the accuracy of TrustPower’s financial statements is

not relevant to the matters at issue in this proceeding. I have disregarded it in my

consideration of the issues. However, I add that having heard the evidence for

TrustPower and the Commissioner, I could not conclude that TrustPower’s financial

statements were materially mis-stated and wrong.

[37] The second matter relates to the submission made by Mr McLellan QC on

behalf of the Commissioner, that expenditure in obtaining resource consents was

non-deductible, for the reason that it was incurred for the purpose of improving

capital assets; that is, TrustPower’s interests in the underlying land.

[38] Mr Harley submitted that this argument could not be raised now, as it had not

been pleaded, and as it is barred from being raised by s 138G of the Tax

Administration Act. Section 138G(1) provides that the Commissioner and a

“disputant” may raise in a challenge only those matters raised in their Statements of

Position. Mr Harley submitted that the Commissioner’s Statements of Position,

while referring to “rights in relation to land” (in the context of expenditure incurred

in developing the projects themselves, rather than what the resource consents

provided to TrustPower) do not put forward a proposition that the resource consents

are an improvement to the land.

[39] Mr McLellan submitted that the issue of whether the resource consents

enhance or improve land was not “new”. He provided references to the

Commissioner’s Statement of Position. I have not found in those references any

clear statement to the effect that the Commissioner was asserting that the expenditure

incurred in obtaining the resource consents was of a capital nature, having been

incurred for the purpose of improving or enhancing the underlying land. Further, I

accept that there is no pleading to that effect.

[40] Accordingly, I accept Mr Harley’s submission that the argument cannot now

be raised. Notwithstanding that, Mr Harley addressed the argument in his

submissions and, for that reason, the issue will be referred to later in this judgment.

Issues emerging in closing submissions

[41] Although counsel framed the issues in different terms, there are four principal

issues (each of which raises sub-issues) to be determined:

(a) Are the resource consents obtained by TrustPower for the Arnold,

Kaiwera Downs, Mahinerangi, and Wairau projects assets, on a stand-

alone basis, (that is, separate from the projects to which they relate)?

If the answer to this question is “no”, then because TrustPower had

not committed to the projects, the expenditure it incurred in obtaining

the resource consents is feasibility expenditure and therefore

deductible.

(b) If, however, the resource consents are stand-alone assets, the nature of

the expenditure needs to be determined. Are the resource consents

capital or revenue assets? If the answer to this question is that they

are capital assets, then the expenditure incurred in obtaining them will

not be deductible. If the answer is that they are revenue assets, the

expenditure will be deductible.

(c) If the resource consents are capital assets, was the Commissioner

wrong in her conclusions as to the dates from which TrustPower’s

expenditure was to be classified as being principally for the purpose

of obtaining them (such dates being those from which the

Commissioner considers that TrustPower was committed to applying

for the resource consents)?

(d) If the Commissioner was correct as to the dates from which

TrustPower was committed to applying for the resource consents, did

she wrongly allocate expenditure as between feasibility expenditure,

and the expenditure incurred in obtaining the resource consents?

The “general permission” and the “capital limitation”

[42] For taxation purposes, the distinction between capital expenditure and

revenue (income) expenditure is created by the ITA 2004. Pursuant to s DA 1 (the

“general permission”) expenditure which is incurred in deriving assessable income is

deductible:

DA 1 General permission

Nexus with income

(1) A person is allowed a deduction for an amount of expenditure or loss

(including an amount of depreciation loss) to the extent to which the

expenditure or loss is —

(a) incurred by them in deriving —

(i) their assessable income; or

(ii) their excluded income; or

(iii) a combination of their assessable income and

excluded income; or

…

General permission

(2) Subsection (1) is called the general permission.

[43] However, pursuant to s DA 2(1) (the “capital limitation”), a deduction is not

allowed if expenditure is of a capital nature:

DA 2 General limitations

Capital limitation

(1) A person is denied a deduction for an amount of expenditure or loss

to the extent to which it is of a capital nature. This rule is called the

capital limitation.

Relationship of general limitations to general permission

(7) Each of the general limitations in this section overrides the general

permission.

The capital/revenue determination: overview of leading authorities

[44] In his judgment in Inland Revenue Commissioners v British Salmson Aero

Engines Ltd (“British Salmson”) (concerning whether a royalty payment made by a

user of a patent was a capital or income payment), Sir Wilfred Greene MR

observed:5

There … have been … many cases where this matter of capital or income

has been debated. There have been many cases which fall on the border-

line. Indeed, in many cases it is almost true to say that the spin of a coin

would decide the matter almost as satisfactorily as an attempt to find

reasons.

[45] Templeman J expressed a similarly pessimistic view in his judgment in

Tucker (Inspector of Taxes) v Granada Motorway Services Ltd (“Granada Motorway

Services”), concerning a payment made to secure modifications of rent obligations

under a lease.6 His Honour said:

7

The forensic field of conflict involved in this appeal [as to whether a

payment to secure a more favourable lease was of a capital or revenue

nature] is an intellectual minefield in which the principles are elusive …,

analogies are treacherous …, precedents appear to be vague signposts

pointing in different directions …, and the direction finder is said to be

“judicial common sense” … The practice of judicial common sense is

difficult in Revenue cases.

(References omitted)

[46] Despite this pessimism, the courts have formulated and discussed tests for

classifying expenditure as being on capital or revenue account. In Hallstroms Pty

5 Inland Revenue Commissioners v British Salmson Aero Engines Ltd [1938] 2 KB 482 (CA) at

498. 6 Tucker (Inspector of Taxes) v Granada Motorway Services Ltd (1979) 53 TC 92 (ChD).

7 At 96–97.

Ltd v Federal Commissioner of Taxation (“Hallstroms”), Dixon J referred to Sir

Wilfred Greene’s observation in British Salmson, but was:8

… not prepared to concede that the distinction between an expenditure on

account of revenue and an outgoing of a capital nature is so indefinite and

uncertain as to remove the matter from the operation of reason and place it

exclusively within that of chance, or that the discrimen is so unascertainable

that it must be placed in the category of an unformulated question of fact.

[47] His Honour went on to say:9

What is an outgoing of capital and what is an outgoing on account of

revenue depends on what the expenditure is calculated to effect from a

practical and business point of view, rather than upon the juristic

classification of the legal rights, if any, secured, employed or exhausted in

the process.

The practical and business point of view – the BP Australia indicia

[48] In giving the judgment of the Privy Council in BP Australia Ltd v

Commissioner of Taxation for the Commonwealth of Australia (“BP Australia”)

(concerning whether a payment to service station proprietors as consideration for the

proprietors’ agreement to sell one brand of petrol, exclusively, was capital or

revenue), Lord Pearce said in relation to the approach to be taken to the

capital/revenue determination:10

The solution to the problem is not to be found by any rigid test or

description. It has to be derived from many aspects of the whole set of

circumstances some of which may point in one direction, some in the other.

One consideration may point so clearly that it dominates other and vaguer

indications in the contrary direction. It is a common sense appreciation of

all the guiding features which must provide the ultimate answer. Although

the categories of capital and income expenditure are distinct and easily

ascertainable in obvious cases that lie far from the boundary, the line of

distinction is often hard to draw in border line cases; and conflicting

considerations may produce a situation where the answer turns on questions

of emphasis and degree. That answer:

“depends on what the expenditure is calculated to effect from a

practical and business point of view, rather than upon the juristic

classification of the legal rights, if any, secured, employed or

exhausted in the process”

8 Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 646.

9 At 648.

10 BP Australia Ltd v Commissioner of Taxation for the Commonwealth of Australia [1966] AC 224

(PC) at 264–265.

As each new case comes to be argued felicitous phrases from earlier

judgments are used in argument by one side and the other. But those phrases

are not the deciding factor, nor are they of unlimited application. They

merely crystallise particular factors which may incline the scale in a

particular case after a balance of all the considerations has been taken.

(Citation for Hallstroms omitted)

[49] The analysis in BP Australia has been endorsed in New Zealand. In

Commissioner of Inland Revenue v McKenzies (NZ) Ltd (“McKenzies”), the Court of

Appeal considered whether a payment to secure the surrender of a lease was of a

capital or revenue nature.11

Delivering the judgment of the Court (holding that the

payment was capital), Richardson J set out the observations of Lord Pearce in BP

Australia as to the capital/revenue determination, then went on to say:12

Amongst the factors weighed by the judicial committee in BP Australia

were: (a) the need or occasion which called for the expenditure; (b) whether

the payments were made from fixed or circulating capital; (c) whether the

payments were of a once and for all nature producing assets or advantages

which were an enduring benefit; (d) how the payment would be treated on

ordinary principles of commercial accounting; and (e) whether the payments

were expended on the business structure of the tax payer or whether they

were part of the process by which income was earned.

His Honour said that it was “a matter of analysing the particular transaction ... by

reference to the legal arrangements entered into and carried out and taking into

account surrounding circumstances”.13

[50] More recently, the Privy Council endorsed the BP Australia indicia in

Commissioner of Inland Revenue v Wattie (in relation to a determination whether an

incentive payment for entry into a lease was capital or revenue).14

The Privy

Council noted that the BP Australia indicia had been described by Richardson J in

Commissioner of Inland Revenue v Thomas Borthwick & Sons (Australasia) Ltd as

exemplifying the “governing approach” in New Zealand.15

11

Commissioner of Inland Revenue v McKenzies (NZ) Ltd [1988] 2 NZLR 736 (CA). 12

At 740. 13

At 742. 14

Commissioner of Inland Revenue v Wattie [1999] 1 NZLR 529 (PC). 15

Commissioner of Inland Revenue v Thomas Borthwick & Sons (Australasia) Ltd (1992) 16

TRNZ 777 (CA) at 779.

The “identifiable asset” test

[51] The decision of Templeman J in Granada Motorway Services that the

payment was capital expenditure was upheld by the Court of Appeal and the House

of Lords. In the House of Lords, Lord Wilberforce set out what has since been

referred to as the “identifiable asset” test. His Lordship said:16

On the one hand the payment was designed to enable the Company to earn

more profits: from this point of view it might be thought that the payment

should have a revenue character. On the other hand, the payment produced a

modification in the lease, which could be regarded as an identifiable asset,

making the lease less disadvantageous: from this point of view it might be

thought that the payment should be regarded as a capital payment. It is

common in cases which raise the question whether a payment is to be treated

as a revenue or capital payment for indicia to point different ways. In the

end the courts can do little better than form an opinion which way the

balance lies. There are a number of tests which have been stated in reported

cases which it is useful to apply, but we have been warned more than once

not to seek automatically to apply to one case words or formulae which have

been found useful in another ... I think the key to the present case is to be

found in those cases which have sought to identify an asset. In them it

seems reasonably logical to start with the assumption that money spent on

the acquisition of the asset should be regarded as capital expenditure. ...

Later in his judgment, Lord Wilberforce said of the identifiable asset test:17

The test may be to some extent arbitrary, but it provides a means which the

courts can understand for distinguishing capital and income expenditure and

I think that we would be wise to maintain it.

Further New Zealand authorities

[52] In Buckley & Young Ltd v Commissioner of Inland Revenue (“Buckley &

Young”), the Court of Appeal had to decide whether payments to a departing director

of the company were of a capital or revenue character.18

The director agreed to leave

the company, and entered into a restrictive covenant not to compete with, or divulge

information about, the company. In return, he was to be paid $6,000 a year, together

with other payments. In his judgment for the Court, Richardson J observed that:19

... what is involved is the fundamental distinction between the source of the

income and the income earning process; between capital and income;

16

Tucker (Inspector of Taxes) v Granada Motorway Services Ltd (HL), above n 6, at 106–107. 17

At 108. 18

Buckley & Young Ltd v Commissioner of Inland Revenue [1978] 2 NZLR 485 (CA). 19

At 488.

between expenses affecting the business structure or entity and operating

expenses. ... [t]he essential question is as to the true character of the

payments made and the benefits provided. But, while that distinction is well

recognised, it is equally well established that there is no single yardstick or

test. ...

[53] His Honour set out the alternatives on the opposite sides of the

capital/income dividing line in Buckley & Young as follows:20

A payment made as a matter of commercial necessity or expediency to

secure the removal of an unsatisfactory director or employee is referable

only to the current business operations of the taxpayer in gaining its

assessable income and that also stamps it with the character of a revenue and

not a capital disbursement. ... But a payment made to a retiring director or

employee in return for a restrictive covenant ... which has the effect of

buying off competition, of its very nature affects the value of the company’s

goodwill and is referable to the income earning structure rather than to the

income earning process and is of a capital nature.

The Court held that the payments in question had a dual character, as being revenue

(and deductible) insofar as they referred to securing the director’s retirement, and

capital (and not deductible) to the extent that they referred to the restrictive covenant.

[54] In McKenzies, Richardson J observed that in BP Australia, and in the

“companion case” involving Mobil Oil Australia Ltd, the decision was that the

payments were revenue payments, but in Regent Oil Co Ltd v Strick (Inspector of

Taxes), delivered the same day, the House of Lords (with the same Bench) held that

the oil company’s payments were capital expenses.21

His Honour said that:22

The different result is a valuable demonstration of the importance of

evaluating the facts of particular cases and recognising ... that the capital

income field is an intellectual minefield in which the principles are elusive

and analogies are treacherous.

(reference to Granada Motorway Services omitted)

[55] Richardson J also referred to the identifiable asset test set out in Granada

Motorway Services, and observed that Lord Wilberforce had endorsed the test in the

sense that so long as the expenditure in question could be clearly referred to the

acquisition of an assets which satisfied one or other of the accepted categories, the

20

At 489. 21

Regent Oil Co Ltd v Strick (Inspector of Taxes) [1966] AC 295 (HL). 22

McKenzies, above n 11, at 741.

test must be a critical one. However, the test would yield in cases where there were

sufficient indicators pointing the other way.23

[56] As the Court of Appeal observed in McKenzies, in uncomplicated cases, one

or more factors may very clearly point to the expenditure being capital or revenue in

nature, so recourse to all of the factors referred to may be unnecessary. However, in

borderline cases, it is necessary to analyse the facts as a whole, and consider which

factors carry the most weight. As noted in Hallstroms, the capital/revenue decision

requires considering what the expenditure was calculated to effect, from a practical

and business point of view, rather than a juristic classification of legal rights.24

Resource consents and the Income Tax Act

Resource consents

[57] The “Type 2” resource consents obtained by TrustPower were land use

consents, water permits, and discharge permits. Pursuant to s 9 of the RMA, a

person cannot use land in a manner which contravenes a national environmental

standard prescribed under s 43 of the RMA, or a rule in a district or regional plan,

unless such use is either expressly permitted by the RMA, or the person is authorised

to use the land in a manner which is otherwise prohibited by the RMA, national

environmental standards, or a district or regional plan. Similarly, a water consent

permits a person to use water (other than in a coastal marine area) in a way which

would otherwise contravene s 14 of the RMA, and a discharge consent permits a

person to discharge contaminants (other than in a coastal marine area) in a way that

would otherwise contravene s 15 of the RMA,

[58] A resource consent is, therefore, permissive. It authorises a certain land use

or activity, that would otherwise be unlawful. If the consent is exercised, it must be

in accordance with any conditions imposed in the grant of the consent. A person

granted a resource consent is not required by the RMA to exercise it, but if the

consent is not exercised within its prescribed duration, it will lapse.

23

At 746. 24

Hallstroms, above n 8, at 648.

[59] Section 88(1) of the RMA provides that “a person” may apply for a resource

consent. Thus, an application can be made for a resource consent over land the

applicant does not own, or to which the applicant does not have agreed access.25

Section 88(2) provides that the application must be made in the prescribed form and

manner, and must include, in accordance with Schedule 4, an assessment of

environmental effects in such detail as corresponds with the scale and significance of

the effects that the activity may have on the environment.

[60] Section 122(1) of the RMA provides that “a resource consent is neither real

nor personal property”.

[61] Pursuant to s 134 of the RMA, land use and subdivision consents attach to the

land to which they relate, so may be “enjoyed” by the owner and occupier of the

land. If the holder of the consent does not own the land, then the owner and the

holder may each “enjoy” the land use consent. The holder of the resource consent

may transfer the holder’s interest in the consent, pursuant to s 134(3) of the RMA.

Other consents, such as permits to take water or to discharge contaminants, may in

certain circumstances be transferred by the holder of the permit, in accordance with

ss 136 and 137 of the RMA, respectively.

Resource consents in the context of the Income Tax Act

[62] Section DB 13B of the ITA 2004 provides (as amended as from 1 October

2005) that a person who applies for a resource consent under the RMA, and is

refused the grant or withdraws the application, is allowed a deduction for

expenditure incurred in relation to the application, that would have been part of the

cost of depreciable property, or otherwise a deduction, if the application for resource

consent had been granted, and for which a deduction is not allowed under another

provision.

[63] Section EE 53(1) (in subpart EE “Depreciation”) of the ITA 2004 provides

that depreciable intangible property means the property listed in Schedule 17.

Section EE 53(2) sets out the criteria for property to be listed in Schedule 17. It is

25

See MacLaurin v Hexton Holdings Ltd [2008] NZCA 570, (2008) 10 NZCPR 1 (CA), at [47].

required to be intangible, and to have a finite useful life that could be determined

with a reasonable degree of certainty at the date of its acquisition. Section EE 53(3)

provides that property listed in Schedule 17 is depreciable intangible property even if

the criteria in s EE 53(3) are not met.

[64] Pursuant to s OB 1 (definition of “property”), “property” in subpart EE

includes consents granted under the RMA. Thus, for the purposes of subpart EE

(Depreciation), s OB 1 of the ITA 2004 overrides s 122 of the RMA, and resource

consents can be property. The explanatory note to the introduction to s OB 1 states

that the provision was introduced to “include for depreciation purposes consents

under the [RMA]” due to certain consents (those listed in Schedule 17) being able to

be treated as depreciable intangible property.26

[65] The property listed in Schedule 17 of the ITA 2004 (depreciable intangible

property) includes, at clause 9:

9 a consent granted under the [RMA] to do something that otherwise

would contravene sections 12 to 15 of [the RMA] (other than a consent for a

reclamation), being a consent granted in or after the 1996-97 tax year

Submissions as to the statutory context

[66] For the Commissioner, Mr McLellan relied on s OB 1 of the ITA 2004 to

argue that under the ITA, resource consents are property. He further submitted that

ss DB 13B and EE 53 (together with clause 9 of Schedule 17) support the conclusion

that resource consents are prima facie capital assets, and that the purposes of s DB

13B shows that resource consents should be capitalised. In support of this

submission, Mr McLellan referred to the explanatory note on the introduction of the

legislation under which s DB 13B was inserted into the ITA 2004. The explanatory

note in respect of s DB 13B stated:27

Patent and resource management application costs

An amendment is proposed that allows costs associated with patent and

resource management consent applications to be deducted, although the

applications are not granted or are withdrawn. Costs for such applications

26

See Taxation (Miscellaneous Issues) Bill 1995 (No 109-1) (explanatory note) at xv. 27

Taxation (Annual Rates, Venture Capital and Miscellaneous Provisions) Bill 2004 (No 110-1)

(explanatory note) at 5.

cannot currently be claimed under the general deductibility rules as they are

a capital expense. Nor can they be depreciated as there is no depreciable

asset. Under the proposed change, the deductible expenditure consists of

those costs that would have been depreciable if a patent or resource

management consent had been granted.

[67] Mr McLellan also referred to the Commentary on the Bill:28

Patents and certain consents issued under the [RMA] are depreciable

intangible property. To the extent expenditure incurred in applying for a

patent or resource management consent results in an application being

granted, the costs must be capitalised and depreciated. However, if an

application is unsuccessful or is withdrawn, any costs incurred up to that

point are not depreciable as there is no depreciable asset. Nor can this

expenditure be expensed under the general deductibility rules because it is

capital in nature.

Mr McLellan submitted that s DB 13B made it clear that resource consents, once

granted, are capital assets, and hence must be property.

[68] Mr Harley submitted that subpart EE does not apply in this case, as

TrustPower did not use, or have available for use, the resource consents during the

relevant tax years.29

On that basis, he submitted, the consents were not depreciable,

and the expenditure incurred in obtaining them was deductible under the general

permission. Thus, pursuant to s EE 7(j), the resource consents cannot be depreciable

property, s OB 1 cannot apply, and under s 122 of the RMA, the consents would not

be property.

[69] Mr Harley further submitted that s DB 13B of the ITA 2004 is irrelevant to

the issues to be considered in this proceeding. He submitted that s DB 13B cannot

inform the decision as to whether the expenditure is deductible. He submitted that

s DB 13B is not a catch-all provision.

28

Policy Advice Division “Taxation (Annual Rates, Venture Capital and Miscellaneous Provisions)

Bill 2004, Commentary on the Bill” (Inland Revenue, Wellington, 2004) at 9. 29

The relevant tax years were the years ending 31 March 2006, 2007, and 2008. The resource

consents for the projects were granted as follows: Arnold: 17 December 2010; Kaiwera Downs:

30 May 2009; Mahinerangi: 15 December 2008; Wairau: 8 June 2011. In each case the consents

were pursuant to a decision of the Environment Court.

Discussion

[70] In Aoraki Water Trust v Meridian Energy Ltd (“Aoraki Water Trust”)

(concerning an application to take water in respect of which Meridian had a permit to

take all the available water), a Full Court of the High Court referred to s 122 of the

RMA and said that, pursuant to s 122(1), a resource consent is not itself either real or

personal property, but creates a right to use a resource.30

[71] In Marlborough District Council v Valuer-General, Ronald Young J

discussed s 122 in the context of an application for a declaration that mussel farms

authorised by coastal permits under the RMA were rateable as “land”.31

His Honour

accepted that s 122(1) prevents the courts from recognising any property rights, real

or personal, in respect of resource consents except where, and only to the extent that,

Parliament has provided for them. In the case before him, his Honour concluded that

the grant and operation of a coastal permit did not give rise to any real property.32

[72] In another context, concerning different legislation, s 122 of the RMA has not

been regarded as determinative. In its judgment in New Zealand Maori Council v

Attorney-General (“NZ Maori Council”), the Supreme Court accepted that water

permits obtained by Mighty River Power were properly regarded as “interests in the

Waikato River”, and were “assets” as defined in the State-Owned Enterprises Act

1986.33

In this respect, the Court differed from the position taken by Ronald Young J

in the High Court, in reliance on s 122 of the RMA.34

The Supreme Court went on

to observe, however, that the issue before it was not whether the water permits were

property rights, rather whether the public offering of shares in Mighty River Power

constituted a disposal of any such rights. The Court held that it did not.35

[73] In this case, the provisions of the RMA establish the nature of the “legal

arrangements entered into”36

(that is, the resource consents applied for and obtained)

30

Aoraki Water Trust v Meridian Energy Ltd [2005] 2 NZLR 268 (HC) at [35]. 31

Marlborough District Council v Valuer-General [2008] 1 NZLR 690 (HC). 32

At [41]–[59]. 33

New Zealand Maori Council v Attorney-General [2013] NZSC 6, [2013] 3 NZLR 31 (SC) at

[81]. 34

New Zealand Maori Council v Attorney-General [2012] NZHC 3338 at [334]. 35

New Zealand Maori Council v Attorney-General, above n 33, at [81]–[82]. 36

See McKenzies, above n 11, at 742.

but while that is an important part of the analysis, it does not determine the

interpretation and application of the tax legislation. While it is necessary to consider

the nature and effect of the resource consents, the RMA provisions do not dominate.

[74] Turning to the ITA 2004, while the parties agree as to which provisions are

relevant, they disagree as to their application. The first area of disagreement is as to

whether s EE 7(j) applies, and so whether subpart EE applies. I accept Mr Harley’s

submission that, as TrustPower did not use the resource consents, or have them

available for use, during the relevant tax years, subpart EE cannot apply. However,

even if subpart EE did apply, it could only be consents permitting activities

otherwise restricted by ss 12–15 of the RMA that are “depreciable intangible

property” pursuant to Schedule 17 of the ITA 2004. Those consents do not include

land use consents, and it is land use consents which are significant in each of the four

projects referred to in this case.

[75] The second area of dispute concerns s DB 13B. I note, first, that s DB 13B

was amended by the Taxation (Base Maintenance and Miscellaneous Provisions) Act

2005. The Select Committee in 2005 commented that:37

The intent of [the 2004 amendment] was to allow a deduction for costs [of a

resource consent application that is unsuccessful or withdrawn] that would

have been depreciable either in their own right or as part of the cost of other

depreciable property, if the application was granted. However, as a result of

the drafting of this provision, these costs are not deductible if they would

have been part of the cost of other depreciable property had the consent been

granted. This was not intended, and we recommend that the bill be amended

to correct this effect.

We recommend amending the bill to provide that consent costs that would

have been deductible if a resource consent had been granted are also within

the scope of these rules. ...

[76] I conclude that s DB 13B provides no guidance as to how resource consents

should be treated. I do not accept Mr McLellan’s submission that the need for s DB

13B supports the proposition that resource consents are identifiable assets that

should be capitalised and may be able to be depreciated. What s DB 13B provides is

that resource consents may be capitalised; it does not provide that they should be.

37

Taxation (Base Maintenance and Miscellaneous Provisions) Bill (231-2) (select committee

report) at 10.

Further, the commentary indicates that resource consents may be separate, or part of

other depreciable property. I do not accept the submission for the Commissioner that

s DB 13B supports a conclusion that all resource consents are separate assets and

that expenditure incurred in applying for them is non-deductible.

[77] While I do not accept Mr Harley’s submission that the provisions of s DB

13B and Schedule 17 of the ITA 2004 are irrelevant, I conclude that it is appropriate

to exercise caution in drawing inferences from the wording of one section of the ITA

2004 as to the interpretation and application of another section. Referring again to

McKenzies, Richardson J’s observation concerning the applicability of provisions

relating to the tax treatment of other kinds of lease transactions to the deductibility of

payments to surrender leases is instructive:38

… we consider that the provisions of the Income Tax Act referring to the

income tax treatment of receipts and payments in relation to other kinds of

lease transactions are an insubstantial foundation from which to draw

inferences as to the assessability or deductibility of payments in respect of

the surrender of leases, one way or the other.

[78] After referring to provisions relating to leases (which did not deal with

payments made or received on surrender of a lease), Richardson J said:39

In the circumstances it would be unsafe to draw any inference of a legislative

purpose other than that their character as capital or income fall for

determination on general taxation principles.

[79] In interpreting and applying ss DA 1 (the general permission) and DA 2, (the

capital limitation) regard must be had to the scheme and purpose of the ITA 2004 as

a whole. The ITA provides a framework, but will not be determinative as to whether

TrustPower’s expenditure in obtaining the resource consents was capital or revenue

in nature. That issue to be determined by considering what the expenditure was

“calculated to effect from a practical and business point of view”,40

and weighing the

factors set out in BP Australia,41

and McKenzies.42

38

McKenzies, above n 11, at 739–740. 39

At 740. 40

See Hallstroms, above n 8, at 648. 41

BP Australia, above n 10. 42

McKenzies, above n 11.

Are the resource consents obtained by TrustPower, on a stand-alone basis,

assets?

Introduction

[80] Mr Harley submitted that the “logically prior” question to whether the

resource consents were capital or revenue assets (and whether expenditure incurred

in obtaining them was capital or revenue in nature) was whether the resource

consents could properly be said to be “assets”. If they are not assets, he submitted, it

follows that there is no need to consider whether they are capital or revenue assets by

applying the BP Australia tests.

[81] The word “asset” is not generally defined in the ITA 2004.43

The question

whether the resource consents are assets arises out of the identifiable asset test

formulated for the purpose of deciding whether expenditure is on capital or revenue

account: see Granada Motorway Services,44

and McKenzies.45

While the word

“asset” is often seen as referring to a proprietary right in something of value, for tax

purposes, the term “asset” has broader application. In Sun Newspapers Ltd v

Federal Commissioner of Taxation (“Sun Newspapers”), Dixon J considered

whether:46

The result or purpose of the expenditure may be to bring into existence or

procure some asset or advantage of a lasting character which will enure for

the benefit of the organization or “profit-earning subject”.

(Emphasis added)

Accordingly, in order to determine the “logically prior” question, it is necessary to

consider the nature of the resource consents, and what they provide for TrustPower.

[82] The resource consents gave TrustPower permission to do something that it

otherwise could not legally do: to use land, to use water, or to discharge

contaminants. Without land use consents, it could not legally construct any of the

four projects. Without water and discharge permits, it could not legally construct the

43

“Asset” is defined in section CU11 and section DU8, both of which relate to mining. The

definitions are restricted to those subparts. 44

Granada Motorway Services, above n 6, at 106-107. 45

McKenzies, above n 11, at 746. 46

Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 361.

Arnold and Wairau hydro projects. Grants of the required resource consents were

necessary for each project to continue along the development pipeline.

[83] The period of a land use consent is unlimited, unless otherwise specified in

the consent. A water or discharge permit may be granted for up to 35 years although

the default duration is five years.47

TrustPower generally sought water and discharge

consents for ten year periods.

[84] Like the ITA 2004, case law is somewhat ambiguous as to whether resource

consents are stand-alone, “separate”, assets. In his decision for the Taxation Review

Authority in Case T53, Judge Barber declined an application by a taxpayer to deduct

legal fees incurred in a successful appeal against the refusal of resource consents

required to carry on a second-hand machinery business.48

In declining the

deduction, Judge Barber said:49

In securing a resource consent it seems to me that the objector has clearly

obtained an enduring benefit or advantage. That resource consent gave the

objector the benefit or advantage of having the legitimate right to trade, or

operate a business, on the particular farmland. This is an intangible benefit

both for the objector company and the land which belongs to GR and his

wife.

Judge Barber said further:50

Mr Brown submits that, on the facts of this case, no identifiable asset is

produced by the expenditure. However, it seems to me that the resource

consent is an intangible asset of the business of the objector. In so far as the

objector submitted that the expenditure related to the protection of a right, I

observe that the expenditure actually relates to the obtaining of a right which

did not previously exist before the granting of the resource consent.

[85] In Milburn New Zealand Ltd v CIR (“Milburn”), Wild J held that expenditure

incurred in obtaining resource consents and licences for Milburn’s quarries for

sourcing aggregate and lime for its cement and concrete business was of a capital,

not revenue nature.51

In the course of considering the “character of the advantage

47

Resource Management Act 1991, s 123. 48

Case T53 (1998) 18 NZTC 8,404 (TRA). 49

At [21]. 50

At [27]. 51

Milburn New Zealand Ltd v CIR (2001) 20 NZTC 17,017 (HC).

sought” (one of the BP Australia indicia), his Honour said of a submission for the

Commissioner that the consents and licences “had a lasting quality”:52

I prefer to view the consents and licences as inseparable from the quarries to

which they are related. But even if they are viewed separately, as assets in

their own right, they are enduring and not recurrent in nature.

[86] In ECC Quarries Ltd v Watkis (Inspector of Quarries) (“ECC Quarries”)

Brightman J considered whether expenses incurred in obtaining relevant consents for

a quarry were capital or revenue.53

In his judgment his Honour expressed doubt as

to whether the consents were assets (in their own right),54

but found that the consents

allowed the subsequent operations of working and winning the minerals. The

consents themselves would not produce profits, but the operations permitted by the

consents would.55

Submissions

[87] Mr Harley submitted that TrustPower’s “Type 2” resource consents cannot be

isolated and seen, on a stand-alone basis, as assets. He submitted that when seen

from TrustPower’s business and practical point of view, the resource consents are

only part of the components of a particular project option, each option is part of the

development pipeline as a whole, and the pipeline is only one of the possible sources

of electricity to be sold by TrustPower. He submitted that the resource consents

“simply tell TrustPower how much fuel it has available to it” and the consents do this

by determining how much water can be used in a hydro station, or how many wind

turbines can be erected on a wind farm. Mr Harley accepted that a grant of resource

consent was necessary to advance a project along the development pipeline, but

pointed out that the grant was not in and of itself sufficient for a decision to be made

to take any project through to the next stage.

[88] Mr Harley further submitted that at the time the resource consents are

granted, the underlying project is inchoate, and has no business utility. The various

conditions imposed in the consent need to be satisfied, and TrustPower needs to

52

At 17,025. 53

ECC Quarries Ltd v Watkis (Inspector of Quarries) [1977] 1 WLR 1386 (ChD). 54

At 1396. 55

At 1397.

make a decision to progress the project to construction, before the project can be

considered as a reality. Without this “reality”, he submitted, neither the underlying

project nor the resource consents were close to being “assets”.

[89] Mr Harley also submitted that the Commissioner’s focus on the resource

consents (and in particular, the AEEs submitted with the application for consents)

focused on the wrong question. He submitted that the proper focus is the role and

place of resource consents in TrustPower’s feasibility and optionality analysis

process. He also submitted that the fact that resource consents may share some

characteristics of real and personal property (such as transferability) did not mean

that the consents were to be recognised by the Court as assets.

[90] Mr McLellan submitted that the resource consents are assets, for the reasons

that they are fundamental aspects of the development pipeline (in which very few

projects are taken to the stage of obtaining resource consents), and the consents

provide value and benefits to TrustPower both by themselves and as part of a

package of rights. He submitted that the resource consents provided TrustPower

with the ability to decide whether to construct the project or defer it until later, the

existence of the consents was a block to any competitor carrying out competing

activity in the same area, and the consents could also be sold by TrustPower. In all

of these respects, the consents were of value to TrustPower. Mr McLellan further

submitted that the resource consents had value to third parties. Accordingly, he

submitted, the consents are properly regarded as assets for tax purposes, under the

ITA 2004.

[91] Mr McLellan also referred to the evidence of Professor Evans, called by the

Commissioner to give expert evidence as to the nature (and in particular the value)

of TrustPower’s resource consents, from the perspective of an economist. Mr

McLellan summarised Professor Evans’ evidence as being that the value of the

resource consents lay in their (a) providing rights to essential resources and the

ability to choose the timing of investment and project expenditure, (b) being property

(intangible assets) independent of (but complementary to) the land to which they

relate, (c) providing enduring flows of services, and (d) being tradable with some

restrictions.

Discussion

[92] I accept Mr Harley’s submission that in none of T53, Milburn, and ECC

Quarries, was a question raised as to whether the taxpayer was committed to

undertaking the operation for which the consents were required. That is, the

taxpayer in T53 was carrying on the business of selling second-hand machinery, and

Milburn and ECC Quarries were concerned with consents for existing quarries.

These cases are, therefore, ones involving what Mr Harley described as “functional

capital assets”. In each case, the consents obtained were a crucial part of carrying on

the business, and are akin to those which TrustPower describes as “Type 1” consents,

for existing operations.

[93] However, the finding in each of these cases that the consents are inseparable

from the business or land to which they relate lends support to the conclusion that

the resource consents in this case cannot be seen as separate assets, on a stand-alone

basis. That is, the consents cannot be seen as assets which are separable from the

projects to which they relate.

[94] I have referred to the evidence for TrustPower in some detail, at [16] to [28],

above, and in the chronologies set out in the Appendix. I accept that TrustPower

obtained the resource consents in the course of taking the respective projects further

along the development pipeline, and that the consents can be said to be part of the

components of each of the project options. While each of the witnesses for

TrustPower accepted that the consents were of value to TrustPower, each said that

that value was only as part of a “bundle”, “package”, or “suite” of rights. I also

accept TrustPower’s evidence that the development pipeline itself is only one part of

TrustPower’s business development: constructing a hydro station or wind turbine to

generate electricity is only one method by which TrustPower sources electricity to

sell. Buying electricity for re-sale is always considered against generating it.

[95] Further, the value of resource consents may be tenuous, at best: for example,

having resource consents is not all that is required for the decision whether to

proceed to construction, or to defer the project. I accept TrustPower’s evidence that

there are many other factors that must be considered. Secondly, the fact that

TrustPower has resource consents will not “block” competitors from competing in

the area. As Mr Campbell said in his evidence for TrustPower, the same wind will

blow across the hill next to where TrustPower has resource consents. I also accept

Mr Harley’s submission that in the absence of a commitment by TrustPower to

proceed to construction, there is very little competitive advantage in holding

resource consents. Further, I accept that resource consents, on a stand-alone basis,

will be of little interest for possible sale. Any value of the consents could only be as

part of a package. Such value as the resource consents may have does not, in my

view, lead to the consents being stand-alone, assets, independent of the projects to

which they relate.

[96] That conclusion is reinforced by the evidence relating to the approach in

relation to Kaiwera Downs (referred to at 2.12 of the Appendix). The offer was to

purchase the site, including the resource consents, technical reports and designs,

landowner agreements, and any physical assets related to the project. That is, the

offer was in relation to the project as a whole, not the resource consents on a stand-

alone basis.

[97] On the particular facts of this case, I therefore find that the resource consents

obtained by TrustPower for the Arnold, Kaiwera Downs, Mahinerangi, and Wairau

projects are not stand-alone assets, separate from the projects to which they relate.

The resource consents are part and parcel of the projects. It would be artificial from

a practical and business point of view to regard them as separate assets in their own

right. The expenditure in obtaining them must, therefore, be treated in the same

manner as the projects. As noted at [11], above, the adjudication unit decided that

expenditure relating to the projects was not capital in nature. Rather, it was

feasibility expenditure. The same conclusion must apply in relation to the

expenditure incurred in obtaining resource consents, as they are not stand-alone

assets, separate from the projects to which they relate. It follows that TrustPower’s

expenditure was feasibility (revenue) expenditure, and is deductible pursuant to the

general permission.

The BP Australia indicia

[98] The above conclusion is sufficient for me to find in favour of TrustPower.

However, for the sake of completeness, and in case it is held that I am wrong in that

conclusion, and the resource consents are stand-alone assets, I go on to consider,

briefly, the BP Australia indicia in order to determine whether they are capital or

revenue assets.

What was the need or occasion which called for the expenditure?

[99] Identifying the need or occasion for expenditure involves considering the

factual background in which the expenditure was incurred, and the reason for the

payment. In Birkdale Service Station Ltd v Commissioner of Inland Revenue, the

Court of Appeal observed that, in that case, the background (in other words, the

“need or occasion for the expenditure”) to the transactions at issue (lump sum

payments made in connection with the taxpayer’s entry into certain agreements) was

of considerable importance.56

If there is more than one reason, the principal reason

for the payment determines the character of the payment.57

[100] Mr Harley submitted that it is evident that there were multiple purposes

behind the expenditure incurred before TrustPower applied for resource consents.

He accepted that one of the purposes of the expenditure was to make an application

for resource consent (if the decision was ultimately made to do so), but submitted

that that was not the principal purpose. None of the purposes was more significant

or more important to TrustPower than others. He submitted that to place emphasis

on one purpose over others was misguided; the focus of the case must be on the

nature or character of the expenditure. The true character of the expenditure incurred

in obtaining resource consents was that it advanced projects along the feasibility

pipeline, and supported pipeline optionality. Thus, the expenditure was of the same

character as TrustPower’s other operating costs.

56

Birkdale Service Station Ltd v Commissioner of Inland Revenue [2001] 1 NZLR 293 (CA) at

[33]. 57

See Christchurch Press Co Ltd v Commissioner of Inland Revenue (1993) 15 NZTC 10,206

(HC) at 10,209.

[101] Mr McLellan submitted that the principal purpose for which TrustPower

incurred the expenditure was to secure resource consents for each of the projects. He

submitted that the principal purpose of instructing consultants to prepare AEEs,

carrying out consultation, and lodging applications for consents was to apply for and

obtain consents. He submitted that it was unrealistic for TrustPower to maintain that

securing resource consents was not the principal purpose of the expenditure.

[102] This question requires the determination of a factual issue. I have accepted

TrustPower’s evidence that the resource consents were applied for and obtained in

the course of taking the respective projects further along the development pipeline. I

would accept that the purpose, or occasion, for the expenditure was not solely or

principally to obtain resource consents. Rather, I would find that 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.

[103] Accordingly, on this aspect of the BP Australia indicia, I would find that the

occasion or need for the expenditure points to it being on revenue rather than capital

account.

Were the payments made from fixed or circulating capital?

[104] The distinction between fixed and circulating capital (as a guide to

determining whether expenditure is of a capital or revenue nature) was noted in the

judgment of the House of Lords in John Smith & Son v Moore, where Viscount

Haldane, drawing on the distinction made by Adam Smith in The Wealth of Nations,

discussed two ways in which profit may be produced: from the sale of purchases on

income account (circulating capital), and from realisation of assets forming part of

the business concern (fixed capital).58

For tax purposes, the former indicates

revenue, the latter capital.

58

John Smith & Son v Moore [1921] 2 AC 16 (HL) at 19.

[105] In Milburn, Wild J was unable to view the test of whether expenditure was

from fixed or circulating capital as compelling, or even useful, and wondered

whether it “might not be given a quiet burial”.59

In Commissioner of Inland Revenue

v Fullers Bay of Islands (“Fullers”) (in which the issue was whether legal fees

incurred in attempting to secure a contract were on capital or revenue account),

Baragwanath J said that the abandonment of the concept of nominal capital in the

Companies Act 1993 pointed to the “unreality” of treating the source of funds as a

significant guide to whether expenditure is to be treated as capital or revenue for tax

purposes.60

Fullers was appealed to the Court of Appeal, which upheld the

reasoning of Baragwanath J.61

In its judgment, the Court of Appeal did not discuss

any of the BP Australia indicia, and made no comment on the utility of the

fixed/circulating capital test.

[106] Mr Harley submitted that in Milburn and Fullers, their Honours did not

correctly refer to the question whether expenditure is part of circulating capital – a

principle with, as he put it, a 120-year pedigree. He submitted that the contrast is

between expenditure which can be seen to create fixed capital assets, and

expenditure which funds revenue operations as cashflows circulate between

purchases of supplies and receipts of sales. On that analysis (adapting the wording

of Lord Pearce in BP Australia), he submitted that the expenditure incurred in

obtaining resource consents could only be seen as part of annual development costs

(circulating capital) which was being turned over and in that process, yielded profits

or loss.62

Mr McLellan submitted that the fixed/circulating capital test did not shed

any light on the issue I have to determine.

[107] The fixed/circulating capital test was applied by the Privy Council in BP

Australia (as “merely one indication and by no means conclusive”63

) and indirectly

endorsed by the Privy Council more recently, by their Lordships’ endorsement of the

BP Australia indicia in Commissioner of Inland Revenue v Wattie.64

The Privy

Council noted that the BP Australia indicia had been described by Richardson J in

59

Milburn, above n 51, at [48]. 60

Commissioner or Inland Revenue v Fullers Bay of Islands [2005] 2 NZLR 255 (HC) at [36]. 61

Fullers Bay of Islands v Commissioner of Inland Revenue (2006) 22 NZTC 19,716 (CA). 62

See BP Australia, above n 10, at 266. 63

BP Australia, ibid. 64

Commissioner of Inland Revenue v Wattie, above n 14.

Commissioner of Inland Revenue v Thomas Borthwick & Sons (Australasia) Ltd as

exemplifying the “governing approach” in New Zealand.65

While I have similar

reservations as to the general utility of this test to those expressed by Baragwanath J

in Fullers, I am not prepared to disregard the test.

[108] In BP Australia, Lord Pearce stated that the test was whether the sums were

“paid out of fixed or circulating capital”.66

This test focuses on the source of the

funds used in the expenditure.67

Lord Pearce contrasted fixed capital:68

... that on which you look to get a return by your trading operations ...

with circulating capital:

... that which comes back in your trading operations ... [expenditure] which

is turned over and in the process of being turned over yields a profit or loss ..

part of the constant demand which must be answered out of the returns of the

trade.

[109] Mr Harley’s submission referred to the use to which the expenditure was put:

contrasting expenditure that creates fixed capital assets, with expenditure that funds

revenue operations as cashflows circulate between purchases of supplies and receipts

of sales. I do not accept that Mr Harley’s submission accurately reflects the

formulation of this test in the authorities.

[110] However, even if Mr Harley is right in his formulation of this test, I do not

find the fixed/circulating capital test useful in this case. First, there is little or no

evidence as to the source of the funds used for the expenditure. Secondly, even if the

focus is on the use of the expenditure, then it would require a determination of the

nature of the resource consents (as capital or revenue assets) before it could be

applied: in other words, on the facts of this case it would be a circular test for

determining if the expenditure incurred in obtaining the resource consents is capital

or revenue in nature.

65

Commissioner of Inland Revenue v Thomas Borthwick & Sons (Australasia) Ltd, above n 15, at

779. 66

BP Australia, above n 10, at 265. 67

See also Mallet v Stavely Coal & Iron Co Ltd [1928] 2 KB 405 (CA) at 413 and 417, and Anglo-

Persian Oil Co Ltd v Dale (Inspector of Taxes) [1932] 1 KB 124 (CA). 68

BP Australia, above n 10, at 265–266.

Was the expenditure of a once and for all nature producing assets or advantages

which were of an enduring benefit for TrustPower?

[111] In British Insulated and Helsby Cables Ltd v Atherton, Viscount Cave

stated:69

... when an expenditure is made, not only once and for all, but with a view to

bringing into existence an asset or an advantage for the enduring benefit of a

trade ... there is very good reason (in the absence of special circumstances

leading to an opposite conclusion) for treating such an expenditure as

properly attributable not to revenue by to capital.

[112] There are two parts to this question: first, whether the expenditure was once

and for all or recurring, and secondly, whether the assets or advantages produced

were of an enduring benefit to TrustPower.

(a) Was the expenditure of a once and for all or recurrent nature?

[113] In Vallambrosa Rubber Co Ltd v Farmer, Lord Dunedin considered it:70

... not a bad criterion of what is capital expenditure as against what is income

expenditure to say that capital expenditure is a thing that is going to be spent

once and for all, and income expenditure is a thing that is going to recur

every year.

In Sun Newspapers Dixon J described the “once and for all” test as a “by no means

successful” attempt to find a test to decide whether expenditure was capital or

revenue.71

His Honour concluded that “recurrence is not a test, it is no more than a

consideration the weight of which depends on the nature of the expenditure.”72

[114] TrustPower acknowledged that, if the focus were solely on individual

resource consents, then the expenditure was properly described as “one-off”.

However, Mr Harley submitted that, as TrustPower regularly incurs expenditure for

obtaining a number of consents within the context of the development pipeline, the

expenditure should be recognised as being recurrent (and pointing towards revenue,

rather than capital, expenditure). Mr McLellan submitted that the expenditure was

“once and for all”, because once obtained, the resource consents endured and did not

69

British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205 (CA) at 213–214. 70

Vallambrosa Rubber Co Ltd v Farmer (1910) 5 TC 529 at 536. 71

Sun Newspapers, above n 46, at 361. 72

Ibid, at 362.

have to be re-applied for in the short to medium term, and once exercised, had a long

duration.

[115] The distinction is not between expenditure which is incurred once only, and

that which is incurred on a regular basis. In Sun Newspapers, Dixon J referred with

approval to the dicta of Rowlatt J in Ounsworth v Vickers Ltd,73

that “the real test is

between expenditure which is made to meet a continuous demand, as opposed to an

expenditure which is made once and for all.”74

In this case the dispute is whether

the resource consents should be seen in isolation, or within the context of the

development pipeline. Lord Pearce considered in BP Australia that it is necessary to

take a broad view of the general operation under which the expenditure was

incurred.75

Taking such a broad view of TrustPower’s operation requires me to

consider the expenditure in obtaining the resource consents within the context of the

development pipeline.

[116] In that context, I would accept TrustPower’s submission that most of the

expenditure was not primarily directed at obtaining the resource consents, but was to

assess the feasibility of the projects and recurrent in nature, being continually

incurred to investigate and define the feasibility of the various projects. It is clear

from the evidence that there were many projects in the pipeline, and some

progressed further than others. Expenditure was continually being made to assess

the feasibility of projects, including (for some projects) expenditure to obtain the

resource consents. While applications for resource consents were not made in all of

the projects in the development pipeline, applications were (to adapt the language of

BP Australia) part of the regular feasibility process, and certainly “one of the current

necessities of” the feasibility process.76

[117] That conclusion can be supported by reference to Commissioner of Taxation v

Ampol Exploration Ltd (“Ampol”).77

That case concerned the nature of expenses

incurred in oil exploration, where the only benefit from the exploration was to be the

73

Ounsworth v Vickers Ltd [1915] 3 KB 267 at 273. 74

Sun Newspapers, above n 46, at 362. 75

BP Australia, above n 10, at 264. 76

Ibid, at 265. 77

Commissioner of Taxation v Ampol Exploration Ltd (1986) 13 FCR 545.

chance of participation in further exploration. In his judgment, holding that the

expenses were deductible, Lockhart J said that the expenditure was:78

... in truth part of the outgoings of the taxpayer in the course of carrying on

its ordinary business activities. It was not expenditure incurred for the

purpose of creating or enlarging a business structure of profit-yielding or

income-producing asset.

In his judgment, Burchett J characterised the expenditure as “an incident in the

operations by which [the business] is carried on.”79

[118] I would conclude that this aspect of the test indicates that the expenditure was

of a revenue nature.

(b) Were the assets or advantages produced of an enduring benefit to

TrustPower?

[119] In Anglo-Persian Oil Co Ltd v Dale (Inspector of Taxes) (“Anglo-Persian

Oil”), Rowlatt J explained that an “enduring benefit” means:80

... a benefit which endures in the way that fixed capital endures; not a benefit

that endures in the sense that for a good number of years it relieves you of a

revenue payment. ... It is not always an actual asset, but it endures in the way

that getting rid of a lease or getting rid of an onerous capital asset ... endures.

Therefore, if expenditure is made to bring about an asset or advantage that endures in

the way that fixed capital endures, this points to the expenditure being capital in

nature.81

[120] Mr Harley accepted that, within the context of the development pipeline, the

resource consents provided benefits to TrustPower, and in that sense, the expenditure

was incurred in order to create or add value. He submitted that this was hardly

surprising, as any company would normally intend expenditure to result in creating

or adding value. More is required before “adding value or a benefit” indicated

expenditure on capital account. However, he submitted, whether the resource

consents were to be seen as securing an enduring benefit is not to be measured by the

78

At 562. 79

At 575, referring to Hallstroms [above n8] at 648. 80

Anglo-Persian Oil Co Ltd v Dale (Inspector of Taxes) (1931) TC 253 at 262, affirmed on appeal

in Anglo-Persian Oil Co Ltd v Dale, above n 67, at 146. 81

Sun Newspapers, above n 46, at 361.

duration of the particular consent. Mr Harley submitted that there is an inherent

uncertainty surrounding the terms and duration of resource consents, once granted,

that is difficult to reconcile with a submission that they provide an enduring benefit

to TrustPower. He further submitted that the resource consents do not produce any

income for TrustPower, absent any commitment to build a generation plant.

[121] Mr Harley also submitted that the resource consents did not provide

TrustPower with an enduring benefit of the kind argued for the Commissioner – that

is, the advantage of strategic optionality as to building the project now, deferring

building, blocking competitors from areas where TrustPower has consents, or selling

the consents. He submitted that the Commissioner’s argument ignored the

multiplicity of purposes served by the development pipeline of which the resource

consents are part, and was based on a misconception of the “value” or “benefit”

provided by the consents.

[122] Mr McLellan submitted that the resource consents provided TrustPower with

an enduring benefit or advantage of strategic optionality. This includes the ability to

proceed immediately with development of the project within the ten-year period

before the consent lapses, to defer construction within that period, to block or

exclude other generators from undertaking competing activities in areas where

TrustPower has been granted consents, or to sell the resource consents (with or

without land, land access rights, or intangible assets such as research and design

work), if the project ceases to be feasible for TrustPower or the price is right.

[123] I accept Mr Harley’s submission that the presence of a project in the

development pipeline does not mean that the project will ultimately result in one of

the benefits argued for by the Commissioner, and referred to in Professor Evans’

evidence. As he submitted, many projects never make it to the stage where any of

the alleged benefits can arise. It is a matter of chance (in the words of TrustPower’s

witnesses, it requires “the stars to align”), whether any project proceeds to that stage.

I also accept Mr Harley’s submission that TrustPower does not know, at the time

expenditure is incurred, whether resource consents will be applied for, or whether the

particular project concerned will progress further along the pipeline.

[124] In Milburn, Wild J considered that regardless of whether the resource

consents were inseparable from the land, or separate assets, they clearly provided an

enduring benefit due to the period of time they were granted for.82

Although I would

accept Mr Harley’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 can therefore provide an

enduring benefit.

[125] This aspect of the BP Australia indicia would, therefore, indicate that the

expenditure in obtaining resource consents should be regarded as capital rather than

revenue expenditure.

How would the payment be treated on ordinary principles of commercial

accounting?

[126] In Milburn, Wild J observed that while accounting treatment might provide a

useful guide in some cases, it is not determinative of the correct treatment for tax

purposes, and it is always subject to the rules of the income tax legislation.83

[127] Expert evidence on accounting standards was called by TrustPower (Mr

Hagen, and Mr Freeman (of PricewaterhouseCoopers, TrustPower’s auditors)) and

by the Commissioner (Mr Hucklesby). They focused on two standards: New

Zealand Equivalent to International Accounting Standards (“NZIAS”) 16 and NZIAS

38. Mr Harley submitted that both NZIAS 16 and NZIAS 38 pointed to the

expenditure on the resource consents being revenue rather than capital. Mr

McLellan submitted that NZIAS 38 applied, and pointed to the expenditure being

capital.

[128] The title of NZIAS 16 is “Property, Plant and Equipment”. Paragraph [2]

provides that it is to be applied in accounting for property, plant and equipment

“except when another Standard requires or permits a different accounting treatment.”

Paragraph [7] provides that:

7. The cost of an item of property, plant and equipment shall be

recognised as an asset if, and only if:

82

Milburn, above n 51, at 17,025. 83

Ibid, at 17,026.

(a) it is probable that future economic benefits associated with

the item will flow to the entity; and

(b) the cost of the item can be measured reliably.

[129] The title of NZIAS 38 is “Intangible Assets”. Paragraph [2] provides that it is

to be applied in accounting for intangible assets, except (as relevant to this case)

intangible assets that are within the scope of another standard. In paragraph [8],

“asset” is defined as a resource:

(a) controlled by an entity as a result of past events; and

(b) from which future economic benefits are expected to flow to

the entity.

An “intangible asset” is defined as:

... an identifiable non-monetary asset without physical substance.

Paragraphs [21] and [22] of NZIAS 38 provide:

21. An intangible asset shall be recognised if, and only if:

(a) it is probable that the expected future economic benefits that

are attributable to the asset will flow to the entity; and

(b) the cost of the asset can be measured reliably.

22. An entity shall assess the probability of future economic benefits

using reasonable and supportable assumptions that represent

management’s best estimate of the set of economic conditions that

will exist over the useful life of the asset.

Paragraph [57] (“Development Phase”) of NZIAS 38 is relevant. It provides:

57. An intangible asset arising from development ... shall be recognised

if, and only if, an entity can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so

that it will be available for use or sale.

(b) its intention to complete the intangible asset and use or sell

it.

(c) its ability to sell the intangible asset.

(d) how the intangible asset will generate future economic

benefits. ...

(e) the availability of adequate technical, financial and other

resources to complete the development and to use or sell the

intangible asset.

(f) its ability to measure reliably the expenditure attributable to

the intangible asset during its development.

[130] Mr Hagen’s opinion was that the only difference between NZIAS 16 and

NZIAS 38 is between a tangible and an intangible asset. Whichever applied, the

expenditure incurred by TrustPower in obtaining the resource consents should be

recognised as feasibility costs, and should not be recognised as the costs of acquiring

a capital asset (whether tangible or intangible). Mr Freeman’s opinion was that

NZIAS 16 applied rather than NZIAS 38, because it was very unlikely that an

intangible asset (as defined under NZIAS 38) would result. Mr Hucklesby’s opinion

was that NZIAS 38 applied and that the resource consents were assets, as defined.

[131] For the purposes of this discussion, if the resource consents are stand-alone

assets (contrary to my earlier finding), they could only be intangible assets. As such,

I doubt that NZIAS 16 would apply.

[132] I therefore turn to consider NZIAS 38. Both TrustPower and the

Commissioner accepted that if the resource consents were intangible assets under

NZIAS 38 and not part of the “development phase” (under paragraph [57]) then they

would be treated as capital. Paragraph [57] of NZIAS 38 is crucial.

[133] The resource consents were obtained in the course of progressing projects

along the development pipeline. If the consents were “assets” as defined in NZIAS

38, then they arose from a development phase. There was no evidence that, at the

time the expenditure was incurred, TrustPower intended to complete the projects in

respect of which the resource consents were obtained (as the adjudication report

found, there was no commitment to construct any of the projects), nor any evidence

that TrustPower intended to use or sell the consents, independent of the projects to

which they related. 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.

[134] Accordingly, I would conclude that this aspect of the BP Australia indicia

indicates that the expenditure in obtaining resource consents should be held to be

revenue rather than capital.

Was the expenditure incurred on the business structure of TrustPower, or as part of

the process by which income was earned?

[135] In Sun Newspapers, Dixon J noted the distinction between:84

... the business entity, structure or organisation set up or established for the

earning or profit” and “the process by which such an organisation operate to

obtain regular returns by means of regular outlay. ...The business structure ...

may assume any of an almost infinite variety of shapes ... In a trade or

pursuit where little or no plant is required, it may be represented by no more

than the intangible elements constituting what is commonly called goodwill

... At the other extreme it may consist in a great aggregate of buildings,

machinery and plant all assembled and systematized as the material means

by which an organized body of men produce and distribute commodities or

perform services.

[136] Mr Harley submitted that the expenditure incurred in obtaining the resource

consents does not create or reflect any business structure of TrustPower. He

submitted that the consents are not means by which TrustPower can produce income,

in the absence of a commitment to build a hydro station or wind turbine. Mr

McLellan submitted that TrustPower’s business structure included capital assets

relating to the generation of electricity, and that the expenditure was incurred

principally for the purpose of creating those assets. He submitted that as TrustPower

cannot legally generate electricity without having such consents, the consents are

fundamental parts of the TrustPower’s business structure.

[137] I would accept Mr Harley’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. As Mr Harley submitted, the Mahinerangi project

illustrates this point. The resource consents for this project were granted in

December 2008. The TrustPower Board approved construction of Stage 1 of the

project in April 2010. 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.

84

Sun Newspapers, above n 46, at 359–360.

[138] I am satisfied that, if it is held that the resource consents are assets, they

could not be regarded as part of TrustPower’s business structure. I would conclude

that this aspect of the BP Australia indicia indicates that the resource consents should

be found to be revenue assets.

From a practical and business point of view, is the expenditure to be regarded as

capital or revenue in nature?

[139] None of these tests is determinative on its own. Rather, each test assists with

determining the central question posed by Dixon J in Hallstroms: what was

TrustPower’s expenditure incurred in obtaining the resource consents “calculated to

effect from a practical and business point of view”?85

I would conclude 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 is revenue in

nature. As the BP Australia indicia were derived to assist in answering the question

posed in Hallstroms,86

the answer is in large part set out in the analysis of the indicia,

and need not be repeated.

[140] I would accept the force of Mr Harley’s submission that the expenditure

incurred in obtaining the resource consents was indiscriminate as part of

TrustPower’s general business operations expenses. The expenditure was not to

secure the specific consents, but to assist TrustPower in determining a source of

supply of electricity. When seen from TrustPower’s business and practical point of

view, the resource consents are only one of the components of a particular project

option, each option is part of the development pipeline as a whole, and the pipeline is

only one of the possible sources of electricity to be sold by TrustPower. A grant of

resource consents was necessary to advance a project along the development

pipeline, but the grant was not in and of itself sufficient for a decision to be made to

take any project through to the next stage.

[141] TrustPower did not use the resource consents in the tax years concerned, and

it did not generate any income from them. I would accept that the resource consents

were of value to TrustPower, only as part of a “bundle”, “package”, or “suite” of

85

See Hallstroms, above n 8, at 648. 86

See BP Australia, above n 10, at 264–265.

rights, and as part of the development pipeline, which itself is only one part of

TrustPower’s business development. Accordingly, from a practical and business

point of view, I would find that TrustPower’s expenditure incurred in obtaining the

resource consents was incurred as part of the feasibility process and is, therefore,

revenue in nature.

Was TrustPower’s expenditure in obtaining resource consent incurred for the

purposes of improving its interest in the underlying land?

Introduction

[142] I turn to consider, briefly, Mr McLellan’s submission that the expenditure was

non-deductible, as it was incurred to improve a capital asset; that is, TrustPower’s

interest in the underlying land. He submitted that TrustPower owned or had interests

in at least part of the land for all four projects, was committed to obtaining (or had an

expectation that it could obtain) the residual land, and incurred the expenditure to

obtain the consents to “improve the functionality of the land”. He submitted that the

functional connection between the land and the consents was illustrated by evidence

that (in the case of Arnold) TrustPower intended to sell land if it did not obtain the

consents.

[143] Mr McLellan 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. He referred to ECC Quarries as authority for the

proposition that expenditure incurred to obtain planning permission to improve the

functionality of land (that is, a capital asset).87

[144] In addition to submitting that the argument could not now be raised, Mr

Harley submitted that the Commissioner’s argument had not confronted important

legal and factual hurdles. These were that the resource consents did not become part

of the land to which they relate, so the consents could be transferred independently

of the land, or TrustPower could sell land it owned without the consents.

Accordingly, the present situation is distinguishable from that in ECC Quarries,

where the planning permission could not, by law, be transferred.

87

ECC Quarries Ltd, above n 53.

[145] Secondly, he submitted that the Commissioner could not say that the resource

consents had resulted in an increase in the value of the underlying land, or that the

land had become more advantageous, or how the land had been “radically and

enduringly changed”88

by the resource consents.

Discussion

[146] I accept Mr Harley’s submission that this argument could not succeed. There

is, in this case, no factual foundation for it. As well, the Commissioner’s argument

does not deal with the evidence given by Mr Campbell (TrustPower’s present

General Manager Generation) that TrustPower prefers easements to land ownership.

In the event that, as a result of the resource consents, there was an increase in the

value of land over which TrustPower has an easement, such increase would accrue to

the landowner, not TrustPower. Nor does the Commissioner’s argument deal with

TrustPower’s evidence that it is often the case (particularly in relation to hydro

projects) that land decreases in value if resource consents are granted for

construction of electricity generation plants.

[147] Accordingly, if I were required to consider the Commissioner’s argument that

the resource consents enhanced the value of the underlying land, and the expenditure

incurred in obtaining the consents is therefore capital expenditure, I would find

against the Commissioner.

TrustPower’s alternative argument: classification of expenditure

Introduction

[148] TrustPower’s alternative argument, in the event that I were to find that the

expenditure in obtaining the resource consents was capital rather than revenue

expenditure, was that the Commissioner wrongly classified expenditure in the

“capital” and “revenue” categories. TrustPower claims that the Commissioner has

wrongly classified approximately $6.5 million as consenting (capital) costs.89

I deal

88

See ECC Quarries, at 1397. 89

As set out in the schedule provided to the Court on 30 August 2013, the exact amount claimed

by TrustPower as having been wrongly classified is $6,565.936.

with this briefly, again for the sake of completeness, and because evidence and

submissions on this argument formed a significant part of the hearing.

[149] It was common ground that the classification depended on whether particular

items of expenditure were incurred as part of the “feasibility” process, or as part of

the “consenting” process. It was also common ground that the primary distinction

between the two was to be made on the basis of when TrustPower could be said to

have been “committed” to applying for resource consents.90

TrustPower submitted

that it was not committed to applying for resource consents until very shortly before

the respective applications were filed. The Commissioner says that the commitment

was at a much earlier date.

[150] A second issue, which arises only if I accept the Commissioner’s argument as

to the “commitment date”, is whether all costs after that date must be classified as

“consenting” (and therefore capital), or whether some costs can be regarded as

continuing the feasibility process (and therefore revenue).

When was TrustPower committed to filing applications for resource consents?

[151] Ms Hablous, who argued this point for TrustPower, referred to the evidence

of Dr Harker and Mr Kedian, which was that Mr Kedian made the decision that

resource consents would be applied for, except in the case of Wairau, where the

TrustPower Board approved lodging the application. She submitted that the decision

to lodge the applications could not be, and was not, made until such time as

TrustPower had all the information required to make a decision whether to proceed

with the applications. TrustPower was not in that position until it had all the

consultants’ reports, and had undertaken all necessary assessments. Ms Hablous

submitted that the fact that the reports were later included in the AEEs was

immaterial. TrustPower’s standard instruction to the consultants was that their

reports were to be in a suitable format for inclusion in the AEEs. That was simply to

avoid unnecessary cost in re-submitting and re-formatting reports.

90

As recorded at [11], above, the adjudication unit found that expenditure on the underlying

projects was feasibility, rather than capital, expenditure, on the grounds that TrustPower had not

committed to proceed with the acquisition or development of any of the projects.

[152] In contrast, Mr Andrews, who argued this point for the Commissioner,

submitted that TrustPower was committed to lodging the applications at about the

time it instructed consultants to prepare reports. He submitted that this work would

not have been commissioned had TrustPower not formed the intention to lodge the

applications.

[153] The competing contentions were as outlined below. I note that a full

chronology for each project is set out in the Appendix to this judgment.

(a) Arnold

TrustPower: The decision to apply for resource consents was made at

or around the time the application was lodged on 29 March 2006.

Prior to that date, TrustPower was still considering the economics of

an amended scheme (the Taramakau diversion) and technical

concerns, and continuing discussions with recreational groups;

Commissioner: The decision was made to apply for resource consents

in November 2005, when Board approval was given to expenditure to

acquire land purchases and option agreements. At that time, the

Board was advised that it was anticipated that the resource consent

application would be lodged around the end of November 2005.

(b) Kaiwera Downs

TrustPower: The decision to apply for resource consents was made at

or around the time the application was lodged on 5 November 2007.

Prior to that time TrustPower had commissioned further reports after a

potential “fatal flaw” was revealed in original visual and landscape

feasibility reports, further modelling work was undertaken, and

project economics were assessed.

Commissioner: The decision to apply for resource consents was made

in May 2007, after draft scoping studies for planning, noise, aquatic

assessment, traffic assessment, and terrestrial ecological assessments

were received, noting that on 27 April 2007 the Board was advised

that consent work had started towards application.

(c) Mahinerangi

TrustPower: The decision to apply for resource consents was made at

or around the time the (second) application for resource consent was

lodged in early December 2006, replacing an application that had

been lodged in late June 2006. The second application did not seek

consent to erect turbines on land owned by Dunedin City Council (and

DCC had asked TrustPower to delay lodging the application). The

application had to be re-worked.

Commissioner: the decision to apply for resource consents was made

in November 2005, when briefs of work for social work, landscape

and visual, traffic, and ecological assessments, and legal services were

sent out. At this time, the Board was advised that lodgement of the

resource consent applications was targeted for late February/March

2006.

(d) Wairau

TrustPower: The decision to apply for resource consents was made at

or around the time the Board resolved to approve an application for

resource consents being lodged, at its meeting in June 2005.

TrustPower says that Board approval was necessary (as recorded in a

report to the Board in April 2004) because of the complexities of the

project. The Board was not presented with a full evaluation report, on

which the project economics could be assessed, until 30 June 2005.

Commissioner: The decision to apply for resource consents was made

in September 2004. At this time, the Board was advised that a

resource consent application was to be lodged in November 2004,

subject to receiving Board approval and securing access/easements in

key positions, and that the economics of the project would deteriorate

only if there were difficulty with landowners or resource management

impediments.

Discussion

[154] I accept the evidence given by TrustPower. The Commissioner’s analysis of

TrustPower’s “commitment” rested on the dates on which consultants were

instructed to prepare reports and/or target or “hoped for” dates of lodgement

provided to the Board. I do not accept that these are reliable indicators of

TrustPower being committed to applying for resource consents. I accept on the basis

of TrustPower’s evidence, supported by the matters recorded in the chronologies,

that TrustPower was not committed to lodging applications for resource consents

until such time as it had received and considered all relevant information.

[155] Further, I accept TrustPower’s submission that the fact that consultants were

instructed to prepare reports in a form that was suitable for inclusion in an AEE is

not evidence of a commitment to lodge an application for resource consents. Rather,

it is an indication that TrustPower was mindful of the possibility (or even

anticipated) that an application would be lodged, and wished to have the necessary

reports ready to go if and when the decision was made to apply. From a business and

practical point of view, this would be to reduce cost and unnecessary duplication.

[156] I would find that TrustPower was not committed to lodging applications for

resource consent until at or around the time the applications were lodged.

Accordingly, I would find that the expenditure incurred up until that time is revenue

expenditure and as such is deductible under the general permission. I am, therefore,

not required to consider the second issue, as to classification of costs incurred after

the “commitment” date.

Result

[157] I find in favour of TrustPower on its primary claim. TrustPower is entitled to

the declaration and determinations sought at paragraph 75 of its First Amended

Statement of Claim.

[158] In the event that costs cannot be agreed between the parties, memoranda may

be filed: on behalf of TrustPower within 20 days of the release of this judgment, and

on behalf of the Commissioner within a further 15 days. Unless the parties in their

memoranda request a hearing, a decision as to costs will be made on the papers.

________________________

Andrews J

Appendix

The four projects: description and chronology

The following description and chronology of each of the four proposed projects is

derived, in the main, from the chronology agreed by the parties, and the agreed

bundle of documents.

1. Arnold hydro

1.1 The Arnold River is the outlet of Lake Brunner on the west coast of the South

Island. TrustPower purchased an existing hydro scheme on the Arnold River in April

1999, and began investigating the potential to enlarge the generation output of the

river. TrustPower’s original proposal (at that time referred to as the Dobson Scheme)

was abandoned in early 2005 following individual feasibility work, as TrustPower

was not able to gain access to Department of Conservation land affected by the

scheme. A new proposal for the scheme was then developed, to take water from

upstream of the existing dam, transport it along a canal for approximately 12 kms,

then drop the water through a newly-constructed power station to a regulation pond

and then back into the Arnold River.

1.2 TrustPower commissioned environmental and engineering studies from

December 2004 onwards. TrustPower management reported to the Board each

month, noting progress as to technical feasibility, gaining land access, consultation,

and the anticipated time when resource consents would be applied for. In a Board

report dated 31 May 2005, it was noted that engineering and environmental briefs of

work had been issued, landowner agreements were in place to allow access for

survey work and basic geotechnical investigations, and the programme remained on

schedule for presentation of a business case to the Board in August 2005, and for an

RMA consent application to be lodged in the fourth quarter of 2005.

1.3 In a Board report dated 28 July 2005, it was noted that easement option

negotiations and feasibility assessment were ongoing, and that subject to the

outcome of those, it was planned to lodge a resource consent application in

December 2005.

1.4 Further briefs of work, and instructions for peer review of work, were issued

during July and August 2005. An “Arnold River Hydro Scheme Development

Project Status Report September 2005” was presented to the Board meeting on 29

September 2005. The report concluded by expressing management’s opinion that

there was potentially significant long term value in the Arnold scheme, and that land

acquisition and resource consents were critical to any future development. It was

recommended that the Board approve expenditure to acquire the necessary land for

“phase one” of the scheme, and to proceed to lodge a resource consent application

before the end of 2005. The Board considered that “phase one” did not appear to be

economic, and that further work needed to be undertaken on the proposal.

1.5 Draft assessments and feasibility studies were received from consultants

during October 2005. A report to the Board for its October 2005 meeting recorded

that public open days had been held, the resource consent application remained on

schedule for December 2005, negotiations with landowners were ongoing,

preliminary design was complete, and a financial analysis was to be presented to the

Board at its November 2005 meeting.

1.6 An “Arnold Hydro Scheme Development Update Report November 2005”

was presented to the TrustPower Board meeting on 24 November 2005. The report

was accompanied by an “Arnold Options Valuation Analysis” appendix. The report

concluded with a recommendation that the Board approve expenditure for necessary

land purchases and option agreements for the “Base Arnold Scheme” (equivalent to

“phase one” referred to in the September Project Status Report), to lodge a resource

consent application around the end of 2005, to begin long term monitoring

programmes in relation to an extension of the base scheme (equivalent to “phase

two” in the September Project Status Report, and known as the “Taramakau

Diversion”), and to purchase or secure options over land potentially required for the

Taramakau Diversion. The Board approved the recommendations for land

acquisitions and completion of the RMA consent application.

1.7 Briefs of work were sent to consultants in respect of the Taramakau

Diversion in late November 2005. Management reported to the December 2005

Board meeting that work was under way with “optimisation of the scheme with the

Taramakau scheme included”, work with landowners continued, and ecological

studies for the Taramakau Diversion were “scoped and out for pricing”.

1.8 Management reported to the Board’s 27 February and 3 April 2006 meetings

that the Arnold scheme was in the “consenting/engineering design” phase, that land

negotiations were progressing, and the preparation of the AEE was “slightly behind

schedule due to the Taramakau addition”. The application for a resource consent

was lodged on 29 March 2006. The application was in respect of the project without

the Taramakau Diversion. Lodgement of the application was reported to the Board’s

27 April 2006 meeting, when it was also noted that negotiations were continuing

with landowners and recreational users.

1.9 Feasibility studies and assessments in respect of the Taramakau Diversion

were received in the period from May to September 2006. During the same period,

and up to late 2010, TrustPower purchased a number of parcels of land and obtained,

where necessary, consent from the Overseas Investment Office.

1.10 The hearing of the application for resource consent began on 5 November

2007. The consent process was eventually completed on 17 December 2010, with a

final decision of the Environment Court.

1.11 In July 2011, an “Arnold Hydro Business Case” was submitted to the Board.

In the section headed “Summary and Recommendations”, it was noted that

TrustPower could shelve the project for review in the future, complete “phase one”

of an “Early Contractor Involvement (ECI) process” (and at obtaining a “Reference

Target Out-turn Cost”) then re-assess the project, or complete the full ECI process

and proceed to a construction investment decision. Management recommended the

second alternative and this was approved by the Board.

1.12 Management presented an “Arnold Hydro ECI Phase 1 (Reference TOC)

Preliminary Update” to the Board’s November 2011 meeting. A further update was

presented to the Board’s April 2012 meeting, in which management recommended

that the ECI work would be suspended, to be reviewed on a six-monthly basis.

2. Kaiwera Downs wind farm

2.1 The Kaiwera Downs wind farm project is a proposed wind farm

approximately 15 kilometres south-east of Gore, in Southland. It was initially

referred to as the “Wilson/Jackson Wind Farm”.

2.2 A report for the August 2005 meeting of the TrustPower Board recorded that

two landowners had been signed up, and appeared to have good prospects for wind

development. At the September and October 2005 Board meetings the Kaiwera

Downs project was recorded as being at the “feasibility-land access/modelling”

stage. Management reported to the November 2005 Board meeting that it was

analysing the two wind farms, and that wind modelling was in place.

2.3 At the December 2005 Board meeting, management reported that wind

resource analysis had been completed, and that the opportunity was being

progressed. It was noted that a resource consent application could follow shortly

after another application which was expected to be lodged in February 2006.

2.4 At the February 2006 Board meeting, management reported that additional

monitoring masts were to be installed, additional landowners had been identified and

would be signed up, and indications were that a wind farm was viable. Monitoring

continued throughout 2006, and further landowners were signed up. As from the

report for the September 2006 Board meeting, the Kaiwera Downs project was listed

in the “consenting/engineering design” phase of the generation development pipeline

table included in the agenda papers.

2.5 During December 2006 and January 2007, TrustPower engaged consultants

for the Kaiwera Downs project. Management reported to the February 2007 Board

meeting that landowner agreements were in place with seven sets of landowners,

discussions were being held with two remaining owners, transmission land access

agreements were in place, and wind monitoring reports were encouraging. At the

March 2007 Board meeting, management advised that consultants had been engaged

for civil design work for the consenting phase of the project, and a public meeting

would be held in Southland ahead of submitting a resource consent application. A

public open day was held in Gore on 29 March 2007.

2.6 Scoping reports were received from consultants during April 2007. The

development pipeline table included in the agenda papers for the April 2007 Board

meeting recorded that work had started towards an application for resource consents.

2.7 In a media statement issued on 10 May 2007, commenting on TrustPower’s

audited financial results for the year ended 31 March 2007, it was recorded that

TrustPower was investigating the potential for a wind farm of up to 185 MW at

Kaiwera Downs, land access arrangements were nearing completion, and wind

monitoring was being undertaken. It was also recorded that a resource consent

application was expected to be lodged in the last quarter of 2007.

2.8 An internal preliminary assessment of the feasibility of the Kaiwera Downs

projected dated 28 May 2007 noted a potential fatal flaw, relating to the landscape

and visual effects of the proposed wind farm, and that further analysis was required

to clarify whether those effects were likely to constitute a fatal flaw.

2.9 On 27 June 2007, TrustPower issued further briefs of work to consultants, for

preparation of reports to be included in the AEE required for the resource consent

application. The pipeline development table included in the agenda papers for the

August 2007 Board meeting recorded that the AEE was nearing completion, and the

site location was being refined on an ecological, geotechnical, and wind resource

basis.

2.10 Peer reviewers were engaged in respect of the consultants’ AEE assessments

in late October 2007. The resource consent application was made on 5 November

2007. Peer reviews of the AEE assessments were received by TrustPower during

November and December 2007.

2.11 The hearing for the resource consent application began on 31 March 2008.

Consents were granted in a decision given in June 2008. An appeal to the

Environment Court was resolved by a consent order made on 13 May 2009.

2.12 In early 2010, TrustPower received an approach concerning a possible

purchase from TrustPower of two wind farm projects: Kaiwera Downs and

Mahinerangi. Following execution of a confidentiality deed, TrustPower provided

an Information Memorandum concerning both projects. In April 2010, TrustPower

received an offer to purchase the Kaiwera Downs site, including the resource

consent, technical reports and designs, landowner agreements, and any physical

assets related to the project. The offer was subject to due diligence and approval by

the offeror’s Board. Although discussions continued for some time, an offer was not

accepted.

2.13 The Kaiwera Downs project has not been developed further, although

feasibility modelling work has continued, and land option agreements have been

extended.

3. Mahinerangi wind farm

3.1 The Mahinerangi project is a proposed wind farm west of Dunedin. It is

close to two TrustPower hydro schemes, Deep Stream and Waipori. Mahinerangi

was earlier referred to as “Eldorado” or “Waipori Wind”. Mahinerangi was

identified in the generation pipeline table for the September 2005 TrustPower Board

meeting, as being in the “land access / monitoring” phase.

3.2 TrustPower engaged consultants to provide landscape/visual and ecological

(terrestrial, aquatic and avian) assessments for the feasibility study phase, in late

October 2005. Management reported to the TrustPower Board meeting in October

2005 that original impressions of a good wind site had been confirmed, that an

application for resource consent to install a “Met Mast” had been submitted, and that

it was aiming to apply for a resource consent for the Mahinerangi wind farm early in

2006.

3.3 In late November 2005, TrustPower engaged consultants to provide

assessment reports to be included in the AEE for an application for resource consent

for Mahinerangi. Management reported to the November 2005 Board meeting that

landowner agreements were proceeding well, and that environmental and

engineering studies were under way, targeting February/March 2006 for lodging an

application for resource consent. The Board was advised at its January 2006 meeting

that management was still on target to lodge a resource consent application in late

February or early March.

3.4 Management reported to TrustPower’s January 2006 Board meeting that

potential turbine sites had been identified, and option agreements had been signed

with two landowners. Negotiations were continuing with four further landowners,

one of which was the Dunedin City Council. Main concerns with the projected

related to the visual impact, traffic effects during construction, and the impact on a

local lizard population. A resource consent application was expected to be lodged in

early April 2006.

3.5 The report for the 3 April 2006 TrustPower Board meeting recorded that

negotiations with the four landowners were continuing, and that a resource consent

application was expected to be lodged in May 2006. At the Board meeting on 27

April 2006, management reported on requests for expressions of interest from

turbine manufacturers, and public and individual consultations that had been held.

3.6 In its media statement issued on 12 May 2007, on the release of its audited

financial results for the year ended 31 March 2006, TrustPower recorded that it

expected to lodge a resource consent application for the Mahinerangi project “within

the next month”, and that it was likely that the project would be completed in stages.

3.7 Management reported at the June 2006 TrustPower Board meeting that

lodging of the resource consent application had been delayed at the request of the

Dunedin City Council. The application for resource consent was lodged in late June

2006.

3.8 A “Valuation Update Report [Mahinerangi] Wind Investment Opportunity”

was presented to the TrustPower Board’s June 2006 meeting. The report set out the

result of computer modelling of the project costs against various changing

circumstances (including exchange rate movements, local construction costs,

availability of imported equipment, HVDC charges, and the uncertainty of resource

consenting and land access) and projected revenue. The report recommended that

TrustPower complete remaining landowner agreements, secure a resource consent

for a 300MW wind farm, and monitor the site to obtain a comprehensive high quality

data set.

3.9 At the August 2006 Board meeting, management reported that it was giving

consideration to reducing the “consenting window” for the Mahinerangi project to

exclude the Dunedin City Council land. The Chief Executive noted that he would be

meeting with the Council to advise that TrustPower would be proceeding with a

smaller project on privately owned land.

3.10 In early September 2006, TrustPower asked its consultants to revise their

earlier assessment reports to allow for a change to the development envelope, to

allow for a maximum generation capacity of 200MW. A second application for

resource consent for Mahinerangi was lodged in early December 2006. The first

application was formally cancelled in January 2007.

3.11 The hearing of the second resource consent application began on 10 May

2007. A decision to grant the consents was given on 27 September 2007. The

decision was appealed to the Environment Court, which issued an interim decision in

July 2008 and a final decision granting consent on 15 December 2008.

3.12 As noted in respect of the Kaiwera Downs project, TrustPower received an

approach as to a possible purchase of the Mahinerangi project in early 2010. No

offer was made in respect of Mahinerangi.

3.13 In a media statement issued on 5 February 2010 on the release of its third

quarter operating results at 31 December 2009, TrustPower recorded that it was

seeking pricing from wind turbine suppliers for Stage 1 of the Mahinerangi project,

and that that process would assist in determining whether it was economically

feasible to progress the project.

3.14 A business case for Mahinerangi Stage 1 was presented to the TrustPower

Board meeting in April 2010. The Board accepted management’s recommendation

to approve construction of Stage 1, from which electricity was to be supplied to the

local distribution network. Stage 1 was completed in May 2011.

4. Wairau River Hydro

4.1 TrustPower purchased the Branch River Scheme in Marlborough in 1998.

The Branch River is a tributary of the Wairau River. Following the purchase,

TrustPower began investigating the potential for an additional hydro scheme on the

Wairau River.

4.2 Management reported to the TrustPower Board meeting on 31 January 2002

that work had started on a survey for a proposed diversion of water from the river,

and that scoping work for environmental and ecological assessments was under way.

In October 2002, management reported as to two potential Wairau River schemes,

one upstream and one downstream of the existing Branch scheme.

4.3 In February and May 2003, management reported as to negotiations with

landowners for access for investigation and feasibility assessment. In May 2003

management also reported that proposals had been sought from consultants for

environmental assessments of the project. Studies were to commence during May,

with a view to completing an AEE for a resource consent application by March 2004.

It was further reported that the key objective of the study was to quantify the river

flow available for electricity generation, and confirm the economic viability of the

project.

4.4 During the remainder of 2003, TrustPower engaged consultants to prepare

feasibility assessments, including assessments of the possible effects of the project

on the landscape and cultural and archaeological aspects of the Wairau Valley, and to

investigate the impact of increased traffic, noise, and dust in construction.

4.5 Tenders were called for geotechnical and engineering assessments in

September 2003, with a target of lodging a resource consent application by March

2004. The terms of reference for the engineering assessments noted that the key

objective of the assessments was to present a preliminary design for the scheme that

was technically and economically viable and environmentally sustainable.

4.6 In a report for the December 2003 TrustPower Board meeting, management

recorded that draft feasibility reports were being reviewed, final draft environmental

and engineering assessment reports would be released for peer review at the end of

January 2004, and work had started on compiling a summary feasibility report and

AEE report. Management continued to report on progress as to technical and

economic appraisal of the project, and consultation with affected landowners, with a

view to the negotiation of easements.

4.7 In a “Project Status Update” presented to the Board on 29 April 2004, it was

recorded that lodgement of an application for resource consents was subject to

receiving the approval of the Board, and securing access/easements to all land in

question.

4.8 A “Wairau Valley Hydro Scheme Feasibility Report” was presented to the

TrustPower Board at its September 2004 meeting, in respect of a scheme to divert

part of the Wairau River flow into the Branch River scheme, then to convey the

water through interconnecting canals and penstocks to five new power stations

spaced over about 46 km in the Wairau Valley. The project was considered to be a

robust, environmentally, technically, and economically viable proposition. Major

risks that could halt development were considered to be the denial of resource

consent, and denial of access by one or more landowners along the scheme.

4.9 A “Wairau Valley Hydro Scheme Development Evaluation Report” was

presented to the June 2005 TrustPower Board meeting. The report noted that the

scheme layout and project design had been refined since the 2004 feasibility

assessment, to mitigate the impact on affected properties and the environment. It

was also noted that as at the date of the report, TrustPower had agreed access to 74

per cent of the required land. Project risks were listed as being denial of resource

consent, a change in government policy, an increasing imbalance between

construction industry supply and demand, and increasing costs. Management sought

and obtained Board approval to lodge an application for resource consent.

4.10 The application for resource consent was lodged on 14 July 2005.

TrustPower continued to seek to secure land access by land acquisition and easement

agreements, and to engage consultants to peer review assessments and respond to

requests for further information under s 92 of the RMA. The application for

resource consent was heard over the period from June to December 2006. An

interim decision was issued in June 2007, and a final decision on 14 July 2008.

Appeals to the Environment Court were heard over the period from November 2009

to May 2010, and the Court’s final decision granting consent was delivered on 8 June

2011.

4.11 While application for resource consent was progressing through the local

authority and Environment Court, TrustPower continued to seek to secure land

access by acquisition or easement agreements. As at the date of the Environment

Court’s final decision, TrustPower had not been able to secure access agreements

with the owners of 36.7 per cent of the land required for the project. Five

landowners were considered to be unlikely to agree to access.

4.12 In his evidence in this Court Mr Campbell (who has been TrustPower’s

general manager, Generation since April 2011) said that Wairau hydro has not

progressed to second step feasibility. It has unresolved land access issues and until

these issues are resolved, the project is not practicable. He added that under current

market conditions the project is also not likely to be economically viable.