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Questions we've been asked: General issues

QB 12/04: Income tax - deductibility of expenditure on widening or metalling a farm acess road or track

All legislative references are to the Income Tax Act 2007 (ITA 2007) unless otherwise stated.

This Question We've Been Asked applies in respect of s DO 4 and sch 20.

The item "Expenses Allowable To Farmers Who Convert To Tanker Collection" was published in Public Information Bulletin No 20, p 11 (March 1965) ("the old PIB item"). This QWBA updates and replaces the parts of the old PIB item that relate to metalling and widening of farm roads and tracks. The current relevance of this information was identified during an ongoing review of content published in Public Information Bulletins and Tax Information Bulletins before 1996. The Commissioner's view on the other parts of the old PIB item that are still relevant are set out in the following items: QB 12/03: Income tax - deductibility of expenditure on cattle stops; Operational Statement 007 - Income tax treatment of certain expenditures on conversion of one farming or agricultural purpose to another; and Interpretation Statement IS0025 - Dairy farming - deductibility of certain expenditure. As a result, the old PIB item is no longer current and should not be relied on. For more information about the review, please see "Review of Public Information Bulletins" in Tax Information Bulletin Vol 23, No 1 (February 2011).

Question

  1. A farmer decides to improve a farm road or track by laying metal or widening the road or track. How is the expenditure treated for income tax purposes?

Answer

  1. The cost of widening or metalling the farm road or track is a capital expense because it substantially alters the nature of the track. Section DO 4 allows for an amortisation-type deduction for capital farm expenditure listed in sch 20. Item 4 in sch 20 refers to the "construction of access roads or tracks to or on the land". The widening or metalling of the farm road or track is the construction of an access road or track under item. So the cost of widening or metalling the farm road or track can be deducted on a diminished value basis at 6%.
  2. If a farmer relays metal on a previously metalled farm road or track, or re-widens a farm road or track to return it to its former condition, the expenditure will be deductible under s DA 1.

Explanation

  1. Several provisions are relevant in determining whether farm expenditure is deductible. If the expenditure is revenue in nature it is deductible under the general permission (s DA 1). Expenditure that is capital in nature cannot be deducted under the general permission because of the capital limitation (s DA2(1)). Various factors are relevant in determining whether expenditure is capital in nature: BP Australia Ltd v C of T (Cth) [1965] 3 All ER 209; CIR v Thomas Borthwick & Sons (Australasia) Ltd (1992) 14 NZTC 9,101 (CA); Christchurch Press Company Ltd v CIR (1993) 15 NZTC 10,206; CIR v Wattie (1998) 18 NZTC 13,991 (PC); and CIR v Birkdale Service Station Ltd (2000) 19 NZTC 15,981 (CA). It is considered in general:
    • The cost of work done to an asset to make good ordinary wear and tear and restore the asset to its former condition will usually be deductible.
    • Where the work done replaces or renews the whole, or substantially the whole, asset or changes the character of the asset the cost of that work will be capital expenditure.
  1. Therefore, if a taxpayer relays metal on a previously metalled farm road then the expenditure will be deductible under s DA 1. Likewise, if a taxpayer re-widens a road to return it to its former condition the expenditure will be deductible under s DA 1. The re-widening may be needed due to a slip or plant growth.
  2. There are also some specific deduction provisions for farm expenditure in subpart DO. The specific provisions override the capital limitation. As a result, if the farm expenditure is capital in nature, it may be deductible under one of the specific provisions.
  3. Section DO 4 allows for an amortisation-type deduction for farm expenditure listed in sch 20. The requirements to obtain a deduction under s DO 4 are as follows (as relevant):
  • DO 4 Improvements to farm land
    When this section applies
    1. This section applies when -
      1. a person carries on a farming or agricultural business on land in New Zealand; and
      2. an improvement described in schedule 20, part A (Expenditure on farming, horticultural, aquacultural, and forestry improvements) has been made to the land; and
      3. the expenditure on the improvement is not expenditure to which sections DO 5 to DO 7 apply.

  • Deduction: expenditure: owner of land
    1. A person who owns the land is allowed a deduction for expenditure to which all the following apply:
      1. it is incurred on making the improvement; and
      2. it is incurred by the person or by another person; and
      3. it is not incurred on anything described in any of sections DO 1 to DO 3; and
      4. it is incurred in the 1995-96 income year or in a later income year, not including the income year in which the person disposes of the land, the income year being the income year of the person who owns the land; and
      5. it is incurred in developing the land; and
      6. it is of benefit to the business in the income year in which the person is allowed the deduction.

    Deduction: expenditure: non-owner of land
    1. A person who does not own the land is allowed a deduction for expenditure to which all the following apply:
      1. it is incurred on making the improvement; and
      2. it is incurred by the person; and
      3. it is not incurred on anything described in any of sections DO 1 to DO 3; and
      4. (it is incurred in the 1995-96 income year or in a later income year, not including the income year in which the person ceases to carry on the business on the land; and
      5. it is incurred in developing the land; and
      6. it is of benefit to the business in the income year in which the person is allowed the deduction.
      ...
  • Link with subpart DA
    1. This section overrides the capital limitation. The general permission must still be satisfied and the other general limitations still apply.
  1. Item 4 in sch 20 provides as follows: 4 construction of access roads or tracks to or on the land
  2. The ordinary meaning of item 4 includes the construction of a new farm road or track (including metalling the road or track) within s DO 4. This is consistent with an answer to a previous question on the deductibility of expenditure for establishing an access track in Tax Information Bulletin Vol 7, No 13 (May 1996): 24.
  3. However, an issue arises whether the widening or metalling of an existing farm road or track comes within the term construction; in item 4. The issue turns on whether the term construction:
    • is limited to the initial building of the road or track, or
    • extends to any subsequent improvements to the road or track.

Ordinary meaning of "construction"

  1. The ordinary meaning of construction; (The Oxford English Dictionary (online ed March 2012, 2nd edition, Oxford University Press, 1989, accessed 21 March 2012)) is:

  2. construction, n. I. The action of constructing. 1. a. The action of framing, devising, or forming, by the putting together of parts; erection, building.
    construct, v. 1. a. trans. To make or form by fitting the parts together; to frame, build, erect.

  3. A similar definition was adopted by the Environment Court in Waitakere City Council v Minister of Defence [2006] NZRMA 253 in the context of the Resource Management Act 1991.
  4. Therefore, the ordinary meaning of construction; has a broad meaning that includes building, erecting and fitting parts together. It is considered that the ordinary meaning of construct; extends to building a subsequent addition to an asset or thing.

Does the purpose of the farming expenditure regime indicate a meaning of "construction"?

  1. The phrase construction of access roads or tracks to or on the land; was initially enacted in 1950 as part of a previous regime for farm expenditure. The original purpose behind the farming expenditure provisions was to encourage primary production and the development of farm land. It is arguable that the initial focus was on the development of newly acquired land or land that was being broken in for a farm. The farm expenditure regime was subsequently amended in 1963 and then again in 1986 and 1991. It appears that by 1963 (and even more so by 1991) the focus seems to have broadened to encourage specific types of farm expenditure. In other words, it appears that the incentive was no longer limited to breaking in farm land. Therefore, the Commissioner considers the re-enactment of the farm expenditure regime in the ITA 2007 was to continue to encourage the specific types of farm expenditure. The nature of the incentive is arguably more supportive of a broad definition of construction;. In other words, as Parliament wanted to encourage farm expenditure it is more likely that Parliament intended additional improvements be included within the scope of construction.

Does the context of the relevant provisions suggest a meaning of "construction"?

  1. The context of the relevant provisions suggests the word construction; extends to any subsequent improvements to a road or track. Specifically:
    • Section DO 4 refers to improvements to farm land. A subsequent widening or metalling of a road or track could be seen as a farm improvement.
    • Section DO 1 is another farm expenditure provision. Section DO 1 allows for the deduction of certain farm expenditure. Section DO 1(1)(f) uses the term construction; in relation to rabbit-proofing an existing fence. Schedule 20 sets out the various types of farm expenditure and the relevant rates. Schedule 20 also uses the term construction; in relation to rabbit-proofing an existing fence. Therefore, s DO 1 and sch 20 arguably link the word construction; with the upgrading of an existing fence. Such an interpretation tends to support the conclusion that the word construction; is not limited to initial construction.
    • The various definitions of construction; and construct; in other enactments are broad. Specifically, the definitions of construction; or construct; in s 2 of the Electricity Act 1992, s 2 of the Public Works Act 1981, s 2 of the Local Government Act 1974 and s 7 of the Building Act 2004 appear to extend to subsequent additions.

Consequences of a narrow interpretation of "construction"

  1. The likely consequence of a narrow interpretation of construction; is that the cost of the widening or metalling would be black hole expenditure. Given the incentive nature of the farm expenditure regime, it is unlikely that Parliament intended the cost of the widening or metalling to be black hole expenditure. So the consequence of the narrow interpretation is also supportive of a broader interpretation of the term "construction".

References

Related rulings/statements
Public Information Bulletin No 20 (March 1965) 11.
Tax Information Bulletin Vol 7, No 13 (May 1996) 24.

Subject references
Dairy farming
Deductibility
Income tax
Metalling and widening existing farm road

Legislative references
Income Tax Act 2007, s DO 4, sch 20

Case references
BP Australia Ltd v C of T (Cth) [1965] 3 All ER 209
Christchurch Press Company Ltd v CIR (1993) 15 NZTC 10,206
CIR v Birkdale Service Station Ltd (2000) 19 NZTC 15,981 (CA)
CIR v Thomas Borthwick & Sons (Australasia) Ltd (1992) 14 NZTC 9,101 (CA)
CIR v Wattie (1998) 18 NZTC 13,991 (PC)
Waitakere City Council v Minister of Defence [2006] NZRMA 253

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