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Mercury NZ v CIR - court case

The recent court case between Inland Revenue and Mercury NZ Ltd is only the second time New Zealand courts have analysed the modern depreciation regime, introduced in 1993.

The case was heard in the High Court at Auckland in June and centred on whether the turbines at Nga Awa Purua and Kawerau are buildings or not.

IRD had said the turbines were buildings and therefore subject to a depreciation rate of zero percent, while the power company said that they were part of the plant, specifically the gantry crane, and therefore the 9.6 percent rate should apply.

On 1 July 2019 Justice Hinton issued her decision in the tax challenge brought by Mercury NZ Limited.

It was an important decision for the department as it was the first case to consider the meaning of “building” in the Income Tax Act 2007, an area of particular significance after the 2010 Budget reduced the depreciation rate for buildings to zero per cent.

Justice Hinton found in the Commissioner’s favour that Mercury’s geothermal turbine halls at Nga Awa Purua and Kawerau were buildings, and accordingly had a depreciation rate of 0%. 

"This is not one of those relatively rare cases where a structure is part of the apparatus for carrying on a business, or so integral to the production process itself, that it should be properly classified as 'plant'," the July 1 decision says.

The judgment is consistent with the Commissioner’s published interpretation statement on the meaning of “building”. It also provided guidance by confirming the questions to be asked and the order of those questions when applying the depreciation provisions.

In her judgment, Justice Hinton says ”the financial implications flowing from the different approaches to depreciation of the powerstation/turbine hall are considerable. The additional depreciation claimable by Mercury for the 2012–2015 years alone …  is estimated at $7.4 million”.

The Court agreed with the Commissioner that “building” is to be given its “ordinary and natural” meaning.

Mercury did not appeal the decision.

Justice Hinton’s decision is available on the Justice website: