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  • Case Law Corner
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Case Law Corner

19 July 2016

Honk Land Trustees Ltd v CIR (deductibility of management fees)

Back in 2005, Honk Land Ltd (“HLL”) who had tax losses “charged” a related trust (Honk Land Trust, “HLT”) over $1m in “management fees”.  The High Court has recently upheld the TRA’s decision that the management services were not in fact provided.  Accordingly, the payment of the fee was not deductible because it was not linked to the earning of assessable income by HLT, or, if that was wrong, the charging of the fees amounted to tax avoidance.

The High Court found that there was no documentary or independent evidence to support that management services were in fact carried out by HLL for Honk Land Trust (“HLT”). A number of concerns were canvassed, including the significance of the management fee as compared to fees the company charged the trust. 

The key points to take from this case are:

  • Only charge for management services where another person has actually performed those services, they must be bona fide;
  • Agree between the parties, before the event, that services will be charged for and what services will be provided (and to whom);
  • Have written evidence, documented at the time of performance, that support the management services have been provided;
  • Charge for the management services on a regular basis;
  • Calculate the fee on a reasonable basis.

As an aside, please do not forget GST.  We often see the payment of GST being inadvertently missed on supplies of management services between associated (or closely connected) persons.

 

Anzco Foods Ltd v CIR (depreciation on intangible property)

In this case the High Court considered the core elements of depreciable intangible property while coming to its decision. The High Court reminded taxpayers and their advisors of the need to carefully construe the terms of a transaction before assuming the tax outcomes.
 
The case concerned land which had been sold by a freezing works company, AFFCO,  in 1999 subject to an encumbrance that restricted the purchaser from using the land for slaughter of livestock, meat processing or freezing for a period of 20 years from possession date. Further this encumbrance was to remain on the land regardless of whether the property was then on sold to another party.

In 2004 the purchaser sold the land to ANZCO, subject to the encumbrance. However ANZCO did not accept that they were bound by the terms of the encumbrance.

Upon acquisition ANZCO leased the land to Itoham to manufacture a variety of meat products. As a result, AFFCO sought to enforce the encumbrance. This resulted in the case being settled that ANZCO paid $5.6M to AFFCO so that the encumbrance can be removed for the purpose of meat processing and freezing.

ANZCO treated the removal of the encumbrance on the land as depreciable intangible property and therefore claimed deductions for the depreciation amounts in its tax return.

The Commissioner disagreed with this and disallowed the deduction for the following reasons:

  • AFFCO had no actual right to use the land to convey to ANZCO;
  • ANZCO did not acquire a right to use the land, rather the $5.6M was paid for the removal of a restriction on the right to use land, which was not legally the same thing;
  • The “right to use land” does not extend to rights which form part of the fee simple estate (which was owned by ANZCO);
  • For an intangible asset to be depreciable it must have a finite useful life that declines in value. The Court held there was no diminishment of the value of the right in the hands of ANZCO;
  • The rights acquired did not have a finite lifespan but were inherent rights of ownership which continue to run with ANZCO’s ownership of the land;
  • The rights were inherent in the fee simple estate owned by ANZCO, so would not be expected to decline over time.

The key points to take from this case are:

  • Do not accept at face value the terms or description used by parties;
  • Land is not depreciable property and the release of a prohibition as to its use does not give rise to a separate entitlement to depreciate.

 

Queenstown Airport Corporation Ltd v CIR (depreciation)

In this case the High Court confirmed the Commissioner’s assessments in declining depreciation deductions for the cost of constructing an embankment and a runway end safety area (“RESA”).

The case concerned an engineered fill embankment out from the existing cliff to provide a safety zone in the event of an incident during landing or take-off which results in an aircraft undershooting or overrunning the runway surface.

The Queenstown Airport Corporation Ltd (“QAC”) claimed a depreciation deduction for the cost of construction of the embankment and RESA on the basis this was a depreciable land improvement. However the High Court confirmed that a depreciation deduction was not allowed on the basis that the embankment and RESA was land which is not a depreciable land improvement (as to be a depreciable land improvement it must be explicitly listed as such in legislation). Further the High Court accepted evidence that it was QAC’s intention that the embankment would “stay in place forever”. Hence having no fixed life, which is required for property to be depreciated.

The key points to take from this case are:

  • A depreciable land improvement must be explicitly listed in legislation;
  • For property to be classified as a depreciable asset it must have a finite useful life that declines in value and is subject to wear and tear.