Income tax - deductibility of expenditure on stock yards

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

This Question We've Been Asked applies in respect of s DO1(1)(f).

This item updates and replaces part of the item "Allowances on Covered Stock Yard" published in Public Information Bulletin No 21, p10 (April 1965) that relates to the cost of fencing new stock yards. 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. As to the remainder of that item, please see the item "Stockyard roof - depreciation" published in Tax Information Bulletin Vol 7, No 8 (February 1996) and paragraph 24 of this QWBA. For more information about the review, please see "Review of Public Information Bulletins" Tax Information Bulletin Vol 23, No1 (February 2011).

Question

1. A farmer is constructing new stock yards. How is the expenditure on the stock yards treated for income tax purposes?

Answer

2. Where stock yards are not an integral part of a wider asset, the cost of constructing the stock yards is deductible in the year in which it is incurred. Assuming the expenditure was incurred in carrying on a farming or agricultural business on land in New Zealand, the deduction is available under s DO1(1)(f) as construction on the land of fences .
3. However, where stock yards are an integral part of a wider asset, such as a shearing shed or dairy shed, the stock yards are not "fences" within s DO1(1)(f). Therefore a deduction is not available for expenditure on the construction of the stock yards incurred in the income year under s DO 1(1)(f). For further information on whether a fence forms part of a wider asset, and discussion of the principles of deductibility in relation to certain farming expenditure, see IS0025 "Dairy farming - Deductibility of certain expenditure" published in Tax Information Bulletin Vol 12, No 2 (February 2000): 17.

Explanation

4. Specific farming deductions are available in subpart DO. Section DO1 (Enhancements to land, except trees) allows an immediate deduction for the expenditure incurred in constructing fences. Section DO 1 overrides the capital limitation. Section DO1(1) relevantly provides:
   
   DO 1 Enhancements to land, except trees
   Deduction
   1. A person is allowed a deduction for expenditure that they incur on the following in carrying on a farming or agricultural business on land in New Zealand:
      ...
      
      6. the construction on the land of fences for farming or agricultural purposes, including buying wire or wire netting for the purpose of making new or existing fences rabbit-proof:
5. Assuming the expenditure was incurred in the carrying on of a farming or agricultural business on land in New Zealand, the ability to deduct the expenditure incurred in constructing the stock yards under s DO 1(1)(f) then depends on whether the stock yards are a collection of "fences" within that section. If the stock yards are not a collection of fences, then the deductibility of the expenditure on stock yards is considered under the general rules of deductibility.

What are stock yards?

6. Stock yards are structures that enclose an area to keep livestock within for a particular purpose. Stock yards are built and used for a wide variety of purposes. Such purposes may include loading out (for sales) or receiving (from purchases), for care (such as trimming hooves, veterinary care, drenching, injecting etc), and stock take (counting). Stock yards can be built of different materials, but usually would be of wood, wood and wire or metal (reinforced steel) construction.
7. Depending on the purpose and use of the stock yards, they may be adjacent to a shed (eg, a wool or dairy shed) or some other farm facility. In such a case, it is necessary to determine whether the stock yards and the barrier surrounding the stock yards are part of a wider asset.

What is a "fence"?

8. The Shorter Oxford English Dictionary (6th ed, Oxford University Press, New York, 2007) relevantly defines "fence" as follows:
   • fence noun…3 a railing or barrier constructed of posts of any of various materials connected by wire, planks, etc., used to enclose and prevent entry to and exit from a field, yard, etc.
9. The dictionary definition shows that the ordinary meaning of the word "fence" is an upright structure that is comprised of posts (of any of various materials) connected by wire or wood. The definition also shows that the purpose of a fence is to enclose an area to prevent or control access to and from that enclosed area.
10. In relation to the rights, duties and liabilities of owners of fences, Halsbury's Laws of England, (5th edition, 2011) vol 4, Boundaries, provides the following definition of fences at [350]:
    • Although fences are frequently used to mark the situation of boundaries, none the less they are primarily guards against intrusion, or barriers to prevent persons or animals straying out, and therefore in this sense the term includes not only hedges, banks, and walls, but also ditches. But an external party wall forming part of a building and alongside or on the boundary of land is not usually regarded as a fence.
11. The word "fence" is also defined in other New Zealand Acts. For example, the Fencing Act 1978 provides the following definitions:
    • Fence means a fence, whether or not continuous or extending along the whole boundary separating the lands of adjoining occupiers; and includes all gates, culverts, and channels that are part of or are incidental to a fence; and also includes any natural or artificial watercourse or live fence, or any ditch or channel or raised ground that serves as a dividing fence.
    • Adequate fence means a fence that, as to its nature, condition, and state of repair, is reasonably satisfactory for the purpose that it serves or is intended to serve
12. While not decided in a tax context, the following cases are useful in that they discuss the ordinary meaning of the word "fence".
13. In the New Zealand Environment Court case of Collins v Wooff [2010] NZEnvC 227, the court, was prepared to contemplate a wider range of fences than typical post and wire fencing when considering what the phrase "standard rural fencing" meant. This was in the context of a resource consent that contained a fencing covenant requiring the defendant to only erect "standard rural fencing" on his property. However, the defendant's case failed because he could not show that the 8 metre stone wall he had erected next to his driveway performed the function of a fence. The court was not persuaded that the fencing covenant necessarily ruled out stone walls because such structures were commonly used as fences on farms in other parts of New Zealand. However, in this case, the wall was not a "fence" because it did not form a barrier or enclose anything. In the court's view the function of a fence is to form a barrier or enclose an area of land.
14. Similarly, in Kontikis v Schreiner (1989) 16 NSWLR 706, 68 LGRA 301 the Court of Appeal of the Supreme Court of New South Wales considered that for a structure to be a fence, the structure must not merely bound land in fact but must be there functionally or essentially for that purpose.
15. In Lahey v Hartford Fire Insurance Co [1968] OR 727 at [6], the Ontario High Court of Justice considered that "fence" referred to "a structure which encloses wholly or partially some piece of property so as to impede ingress and egress. It may be composed of anything so long as it creates a line of obstacle serving this purpose". This was confirmed by the British Columbia Supreme Court in the case of Barrow v Landry [1998] BCJ No 1601.
16. In City of Greater Geelong v Herd 94 LGERA 149, Batt J, in the Administrative Appeals Tribunal (Victoria), considered the ordinary meaning of "fence" and stated (at 172-173):
    • To my mind, the two essential features are the function of enclosing or barring and location along or serving to define a boundary: cf Kontikis v Schreiner (1989) 16 NSWLR 706; 68 LGRA 301, which, I acknowledge, was concerned with the definition in the dividing fences legislation of New South Wales. Lest I be misunderstood I hasten to say that the boundary need not be that of a total property or parcel of land, but can be the boundary of some lesser unit. However, it must be, in my view, the boundary of something that has or at any rate once had physical unity. Thus one can have within a domestic property a fence along the boundary of a vegetable patch, a tennis court, a swimming pool or a chicken coop, to take a few examples. [Emphasis added]
17. In Bass Coast SC v Coastal Estates Pty Ltd [2008] VCAT 1518, the Victorian Civil and Administrative Tribunal cited the above passage in City of Greater Geelong v Herd and then stated (at [57]):
    • The cases referred to included discussion of the purposes of fences including that they are normally to enclose specific areas, or to define them. Such areas may not be limited to the area within a title boundary. Orchard fences, internal paddock fences, cattleyards, tennis courts and so on may enclose particular areas. [Emphasis added]
18. These cases show that the purposes of a fence include any (or a combination) of the following:
    • to enclose an area;
    • to define boundaries; and
    • to provide a barrier and prevent ingress or egress.
      In addition, the cases show that a boundary defined by a fence need not be the entire parcel of land or total property; it can be the boundary of some lesser unit (City of Greater Geelong v Herd; Bass Coast SC v Coastal Estates Pty Ltd).

Are stock yards a collection of "fences" for the purposes of s DO 1(1)(f)?

19. The above discussion shows that a "fence" could be any structure that performs the function or has the purpose of a fence, or it could refer only to structures that are commonly called fences and that fit the dictionary definition of "fence". The Commissioner considers that there is nothing in the Act to suggest that stock yards cannot come within the reference to "fences" in s DO 1(1)(f). Section DO1 refers to certain costs incurred in carrying on a farming or agricultural business in New Zealand. Apart from the expenditure needing to be for the "construction of fences" the provision neither places any restrictions on, nor provides any further guidance as to, the meaning of "fence". In addition, dicta in the case law suggest that a small enclosure, such as a cattle yard, can be described as being surrounded by "fences".
20. Stock yards are an area of land enclosed by what are essentially fences. Stock yards can be smaller than some paddocks, but according to case law the size of an enclosure does not affect whether something is a fence: City of Greater Geelong v Herd; Bass Coast SC v Coastal Estates Pty Ltd. This is consistent with the definition of "fence" in the Shorter Oxford English Dictionary, which states that a fence is "used to enclose and prevent entry to and exit from a field, yard, etc". In addition, in Bass Coast SC v Coastal Estates Pty Ltd, the Tribunal made some obiter comments on the nature of fences and specifically referred to cattle yards as falling within the meaning of "fence".
21. Therefore, the Commissioner considers that stock yards will be a collection of "fences" for the purposes of s DO 1(1)(f).
22. However, as identified in IS0025, sometimes stock yards are attached to other assets, such as dairy sheds or shearing sheds. IS0025 was concerned with ss DO3 and DO 4 of the Income Tax Act 1994, the precursors to ss DO 1 and DO 4 of the Income Tax Act 2007 (s DO 4 no longer provides for fences). IS0025 concluded (at 30):
    • Separate expensing for the pipe work, bails and rails, in terms of section DO 3, is not available. Although it is accepted that the word "fence" has a wide ordinary meaning, it is necessary to take into account the context in which the word is used in the legislation, the nature of a dairy shed, views expressed in cases regarding the integrated nature or entirety of assets, and the legislative background. Given these considerations, on balance, the pipe work forms part of the dairy shed asset itself and is not a "fence" under section DO 3 or section DO 4 [of the Income Tax Act 1994].
23. The Commissioner considers that where stock yards form part of a wider asset, the stock yards would not satisfy s DO1(1)(f).

Covered stock yards

24. Sometimes, a roof or cover is constructed over a stock yard. The item "Allowances on Covered Stock Yard", published in Public Information Bulletin No 21, p 10 (April 1965), was primarily about covered stock yards. For the Commissioner's view on the tax treatment of a stock yard roof, please see the item "Stockyard roof - depreciation" in Tax Information Bulletin Vol 7, No 8 (February 1996). Please note that the calculation method in s DO 4 and the rate in Sch 20 have changed since Tax Information Bulletin Vol 7, No 8 (February 1996) was published. Under the current legislation, the cost of constructing a stock yard roof can be amortised on a diminished value basis at 12% under s DO4 and Sch 20, Item 13, as expenditure incurred on the construction of a structure for shelter purposes.

References

Related rulings/statements
IS0025 "Dairy farming - Deductibility of certain expenditure" Tax Information Bulletin Vol 12, No 2 (February 2000)
"Stockyard roof depreciation" Tax Information Bulletin Vol 7, No 8 (February 1996)

Subject references
Deductibility
Farming expenditure
Fence
Stock yard

Legislative references
Income Tax Act 2007, s DO 1(1)(f)

Case references 
Barrow v Landry [1998] BCJ No 1601
Bass Coast SC v Coastal Estates Pty Ltd [2008] VCAT 1518
City of Greater Geelong v Herd 94 LGERA 149
Collins v Wooff [2010] NZEnvC 227
Kontikis v Schreiner (1989) 16 NSWLR 706, 68 LGRA 301