Inland Revenue has won a tax case against Mercury NZ over the tax classification of two of its turbine halls, which will add an extra $2 million to the electricity generator-retailer's tax bill.

Mercury had brought the case against the IRD as it disputed the tax department's classification of the turbine halls for its Kawerau and Nga Awa Purua geothermal power stations as buildings instead of plant.

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 and therefore the 9.6 percent rate should apply.

Mercury's most recent annual report had noted the litigation could have a tax cost of $6 million, in lost depreciation over the lifetime of the assets.

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Justice Anne Hinton's judgment records the financial implications of the different tax approaches as "considerable", as the depreciation claimable by Mercury for 2012-2015 would be about $7.4 million. That includes the additional $2 million tax cost over the period covered in the dispute.

Mercury's lawyer, Lindsay McKay, had argued that while at first blush the turbine halls may look like buildings, they were really part of the plant.

The judge said her approach would be to look at the ordinary and natural meaning of the word building and noted the IRD had already defined it after depreciation rate changes were made in the 2010 budget.

"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 case was heard in the High Court at Auckland in June.

Mercury shares rose 1.3 percent to $4.64, and have climbed 34 percent so far this year.

- BusinessDesk