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Authorisation Number: 1012811534095

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Ruling

Subject: Taxable Australian Real Property

Question

Are the Wind Farm Assets of the taxpayer 'real property situated in Australia' and therefore taxable Australian real property for the purposes of section 855-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

1 January 20XX to 31 December 20XX

The scheme commences on:

Income year ending 31 December 20XX

Relevant facts and circumstances

1. A Co is a non-resident company that operates in the infrastructure and renewable energy industry. A Co wholly owns B Co, a non-resident company which owns a majority of shares in ABC. A third party entity owns the remaining shares in ABC.

2. ABC (the taxpayer) is a non-resident company which wholly owns XYZ, an Australian company and the head of the XYZ Australian income tax consolidated group.

3. XYZ is a participant in the renewable electricity generation industry in Australia and owns companies that build, own and operate wind farms in Australia.

4. B Co proposes to raise additional capital through an international public offering of some of ABC's assets through a YieldCo.

5. An internal restructure is required to separate the assets intended for public offering.

6. B Co will incorporate a new foreign company, called NewCo1.

7. NewCo1 incorporates a new overseas company (overseas plc), to perform an initial public offering in the future.

8. NewCo1 will acquire the shares in ABC from the shareholders in exchange for shares in it.

9. Overseas plc acquires the assets for the public offer from XYZ.

10. NewCo1 incorporates a new foreign sister company to ABC, called NewCo2.

11. NewCo2 acquires 100% of XYZ.

12. NewCo1 contributes its shares held in ABC to Overseas plc.

Description of the Wind Farm Assets

13. Under the scheme, the wind farm assets (Wind Farm Assets) mean the assets contributing to the operation of the Green and Blue Wind Farms located in two Australian states.

14. All of the Wind Farm Assets are situated on land leased from independent land owners on a commercial basis. The Applicant stated that it was not vital that the Wind Farm Assets situated on a particular leased land, but it was economically beneficial to locate them on the leased land.

15. The Wind Farm Assets include the wind turbine foundations, wind turbines, wind measuring equipment, underground cables, substations and switchyards, overhead transmission lines and switching stations.

16. The Wind Farm Assets are movable (except the concrete foundations). They are designed to be dismantled and relocated without damage to the assets or the land.

The Green Wind Farm

17. The Green Wind Farm is indirectly owned by D Co (a subsidiary of XYZ) which holds an Electricity Generation Licence under the Electricity Industry Act 2000.

18. There are multiple leases in place, but the terms of these agreements are materially the same.

19. The original term of the lease arrangement is 25 years with an option to renew at the request of the tenant.

20. The lease arrangement gives the tenant the right to use the leased land for the purposes of developing, constructing and operating a wind farm.

21. During the term, the tenant has the right to use the services on the land and to install, erect, construct, repair, replace, renew, maintain and operate the met masts, wind turbine generators and/or electrical plant on the premises.

22. Various easements are granted to the tenant including:

• Accessway easements allowing the tenant to have or develop accessways and ongoing access to the land.

• Infrastructure easements to allow the tenant to lay electricity infrastructure to connect the tenant's fittings to the electricity grid.

• Wind resource easements providing access to the land for wind monitoring purposes and giving the tenant the benefit derived from the wind patterns.

23. Under the lease, tenant's fittings (excluding the vehicular or other accessways over the land) remain the property of the tenant at all times.

24. Tenant's fittings broadly include:

• electricity generation facility, being the wind turbines generators and foundations;

• electrical substations, transformers, switchgear and switchyards;

• erection hardstands;

• accessways;

• electrical collection and distribution lines, cables, poles and towers; and

• wind monitoring towers.

25. The tenant is entitled to deal with any tenant's fittings as a means of financing the tenant's fittings.

26. On the expiry date of the lease or the earlier termination, the tenant must remove the tenant's fittings from the premises and make good the land upon termination of the lease. The removal of the concrete is not necessary. However, there is an obligation to cover the concrete as required by the landlord.

The Blue Wind Farm

27. The Blue Wind Farm is owned by a W Co (XYZ's subsidiary) which holds an Electricity Wind Generation Licence for the Blue Wind Farm. W Co is an "electricity entity" within the meaning of the Electricity Act 1996 (Electricity Act).

28. Under the lease arrangement, the landlord is permitted to continue using the land for its purposes including farming, grazing and tourism activities.

29. The lease provides for the tenant to use the land for wind farming. The parties have agreed that the wind farm is not and will not become fixtures and it will remain the property of the tenant at all times.

30. The lease specifies that the right, title and interest in each and every part of the tenant's fittings remain at all times vested in the tenant notwithstanding its level of annexation to the property.

31. Wind farm includes the wind turbines, lines including communication lines, towers, meteorological towers and wind monitoring equipment, electrical transmission and communication cabling and assets, substations and switchyards terminals and accessways.

32. The lease is for 25 years and the tenant has the option to renew the lease with proper notice.

33. The tenant is entitled to remove all or any part of the wind farm during the term. On the cancellation or termination of the lease, the tenant must remove the tenant's assets and restore the surface of the property to a suitable condition for pastoral or agricultural use having regard to its condition and use prior to the wind farm having been installed or constructed.

34. The tenant may but is not obliged to remove any permanent foundations from the land.

Relevant legislative provisions

Australian Income Tax Assessment Act 1997 Section 855-20.

Reasons for decision

Question

Are the Wind Farm Assets of the taxpayer 'real property situated in Australia' and therefore taxable Australian real property for the purposes of section 855-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The Wind Farm Assets of the taxpayer are not 'real property situated in Australia' or taxable Australian real property for the purposes of section 855-20 of the ITAA 1997.

Detailed reasoning

1. Pursuant to section 855-20 of the ITAA 1997, a CGT asset is a taxable Australian real property if it is:

(a) real property situated in Australia (including a lease of land, if the land is situated in Australia); or

(b) a mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, petroleum or quarry materials are situated in Australia.

2. 'Real property' is not defined in the ITAA 1997. Real property broadly consists of land and interests in land. This includes fixtures, which, by definition, constitute part of land.

3. At common law, the general rule regarding fixtures is that an item attached to land by more than its own weight will be a fixture (subject to a contrary objective intention). In TEC Desert Pty Ltd v Commissioner of State Revenue (2010) 241 CLR 576 (TEC Desert), the High Court observed (at 23):

Accordingly, some statement of basic principle is appropriate. In the seventh edition of Megarry and Wade's The Law of Real Property, the following appears [20]

The meaning of 'real property' in law extends to a great deal more than 'land' in everyday speech. It comprises, for instance, incorporeal hereditaments; and it includes certain physical objects which are treated as part of the land itself. The general rule is 'quicquid plantatur solo, solo cedit' ('whatever is attached to the soil becomes part of it'). Thus if a building is erected on land and objects are permanently attached to the building, then the soil, the building and the objects affixed to it are all in law 'land,' i.e. they are real property, not chattels. They will become the property of the owner of the land, unless otherwise granted or conveyed.

4. In determining whether or not the Wind Farm Assets are fixtures at common law, it is generally accepted that the inquiry involves identifying two broad factors: the degree of annexation and the object or purpose of that annexation.

5. These two factors can overlap and are discussed below:

Degree of Annexation

6. If an item of property has been attached to the land other than merely resting on its own weight, there is a rebuttable presumption that the item is a fixture. However, if an item merely rests on its own weight, there is a rebuttable presumption that the item is a chattel (see Australian Provincial Assurance Co v Coroneo (1938) 38 SR (NSW) 700).

7. It is clear that most of the Wind Farm Assets are attached to the land by more than their weight alone. Most of the equipment is bolted to concrete foundations, which are embedded in the soil. Due to the nature of the Wind Farm Assets and the particular 'make good' obligations under these leases, the Commissioner considers the concrete foundations as separate assets from other Wind Farm Assets which are bolted to or resting on those foundations.

8. In the case of the turbine towers, they are secured by approximately 100 high tensile bolts and are hard-wired to other wind-farm infrastructure. It is also observed that the towers themselves are very large. However, the turbine towers are designed to be demountable (albeit that it may take weeks to dismantle and remove the towers).

9. Therefore, it might reasonably be said that the Wind Farm Assets have substantial degree of annexation (notwithstanding their removability) to the land. The burial and/or bolting of the equipment also indicate greater connection to the land than merely the weight of the items.

Object of Annexation

10. The second factor requiring consideration is the affixer's object of annexation at the time of annexation.

11. The Applicant advises that the Wind Farm Assets are designed to be relocatable without damage to the land or the assets, by detachment from the concrete foundations. It is economical to remove and relocate the items if necessary and a secondary market exists for the sale of the Wind Farm Assets. These aspects might suggest an intention that the items should not become part of the land.

12. Under the leases, it is mutually understood that the Wind Farm Assets remain the property of the tenants; the tenants have an ongoing right to remove or relocate the assets and are required to remove all assets (with the exception of the concrete foundations, which it may bury), at the conclusion of the leases.

13. To this end, these factors were present and appear to have been decisive in Commissioner of State Revenue v Uniqema Pty Ltd [2004] VSCA 82 (Uniqema). In Uniqema, notwithstanding that the equipment was "very substantial and complex" the Court found the assets constituted chattels. The Court noted that the equipment was clearly removable. The finding particularly relied on the tenant's ongoing right to remove the assets and the obligation to remove the assets at the conclusion of the lease, together with the mutual acknowledgment of the tenant's ownership of the assets.

14. In Pegasus Gold Australia Ltd v Metso Minerals (Australia) Ltd [2003] NTCA 03 (Pegasus Gold), Mildren J (with whom Martin CJ and Thomas J agreed) found that certain mining assets were chattels. His Honour's decision relied heavily on the object of annexation. His Honour notes that it might be said that the annexation of the equipment was there for the tenant's better enjoyment of the lease. He continues (at 26):

Nevertheless, it is difficult to see how it was ever the objective intention of the appellant to affix the equipment to the soil in such a manner that the equipment became part of the soil and thereby a fixture, given that both the terms of the lease and the Mining Act require the appellant to remove the equipment eventually, that it was economic to do so, and that it could be done without damage either to the soil or to the equipment.

15. In TEC Desert, the Court reached the same conclusion, relying on the mining lessee's obligation to remove the equipment at the end of the lease and that their mining rights were mere personal rights.

16. More recently, in Agripower Australia Ltd v J & D Rigging Pty Ltd and Ors [2013] QSC 164 the nature of the affixer's rights in relation to the land, together with obligations under State law to remove equipment at the end of the lease led the Court to conclude that certain items of mining equipment were chattels.

Status of affixer as tenant

17. The status of the affixer of the object to the land is a relevant consideration in relation to the object of annexation.

18. A land owner is objectively more likely to be attaching items for the land's permanent improvement, rather than a tenant intending 'to make a present to someone else': (see Darmanin v Cowan [2010] NSWSC 1118 (at 201)).

19. In this case, the legal obligation to remove the assets at the end of the tenancy, when considered together with the assets' inherent ability to be relocated, indicates that the Wind Farm Assets are not intended to benefit the land beyond the tenant's occupation. Indeed, it would not accord with ordinary expectation that the landlords, who use the balance of the land for agricultural purposes, would expect to obtain the benefit of the Wind Farm Assets following the departure of the tenant.

Evidence of subjective intention

20. In Pegasus Gold, Mildren J stated (at 21):

I accept that as between, for example, a landlord and tenant, the actual intentions of the parties may well be critical if there was a common intention.

21. The Applicant has asserts that this case, together with several other cases including the Agripower Barraba Pty Ltd v Blomfield [2013] NSWSC 1598, indicate that subjective intention can serve as important evidence in the ascertainment of the objective purpose of annexation.

22. The appeal decision in Agripower Barraba Pty Ltd v Blomfield [2015] NSWCA 30 (27 February 2015), the Full Court (Sackville AJA, Bathurst CJ and Beazley P concurring) held that certain mining equipment outside a processing shed constituted fixtures, but that the items inside the shed were chattels. At paragraph 76, Sackville AJA made the following quote from Palumberi v Palumberi (1986) 4 BPR 910:

… there has been a perceptible decline in the comparative importance of the degree or mode of annexation, with a tendency to greater emphasis being placed upon the purpose or object of annexation, or, putting it another way, the intention with which the item is placed upon land. This shift has involved a greater reliance upon the individual surrounding circumstances of the case in question as distinct from any attempt to seek to apply some simple rule or some automatic solution.

23. The individual surrounding circumstances could include the mutual intention of the parties where an item is affixed by a party other than the land owner.

24. The Applicant contends that the intention of the parties is clearly expressed in the lease agreements under which it is mutually understood that the Wind Farm Assets belong to the tenants and are to be removed at the end of the leases.

25. To the extent that subjective intention can be relied upon as evidence, it strongly points to the characterisation of the Wind Farm Assets as chattels. However, although the subjective intention may inform the factual matrix surrounding the erection of the Wind Farm Assets, subjective intention cannot serve as a substitute for the objectively-discernible object of annexation.

Better use of the land or the object

26. One issue often considered in determining the object of annexation is whether the affixation occurred for the better use of the object or for the better use of the land. The Applicant has argued that each of the items has been fixed to secure its safe operation, limiting vibration and ensuring the assets would not move out of position.

27. However, it appears that the turbines are bolted to particular land which has already been chosen because of its particular suitability (it receive significant wind). It is arguable that the turbines are affixed so as to make best use of the land's attendant benefits (e.g. its windiness). To that end, the affixation is at least as much about the best use of the land as a wind farm as it is about stabilising the turbines to ensure their efficient/safe operation.

28. It is also potentially relevant that the landlord uses the farm land on which the towers are located for grazing. The Wind Farm Assets are evidently not annexed for this purpose. This might ordinarily indicate that the annexation was for the better use of the object rather than the land. However, the Wind Farm Assets are annexed for the tenant's purpose in entering into the lease, that is, for the use of the leased land as a wind farm (that use being compatible with the landlord's use).

29. Where a series of items are annexed to the land to function as part of an integrated system to use the land in a particular way, then the items comprising that system may form part of that land (the assets being annexed for the better use of the land for that particular purpose).

30. In National Dairies (WA) Ltd v Commissioner of State Revenue [1999] WASCA 152 objects which constituted a dairy facility were found to be fixtures. The Court was persuaded that the shed and all of the equipment contained therein formed an integrated dairy processing system annexed for the better use of the land as a dairy. The objectively discernible intention was that the equipment was annexed (by the land owners) for an indefinite period.

31. In Commissioner of State Revenue v Snowy Hydro Ltd [2012] VSCA 145 (Snowy Hydro), six gas turbine generators affixed to the land to generate electricity were found to be fixtures. Evidence indicated that the freehold land was acquired by taxpayer with intention of using it as a power plant. The turbines were installed by owner of the freehold as part of an integrated or interconnected system and they were annexed for an indefinite period. Notwithstanding that the turbines could be removed and relocated, the intention was that the land be used indefinitely for the purpose of generating electricity and the turbines were part of an integrated system. The fact that the affixer is the owner of the land is a prominent feature in the conclusion that the assets in Snowy Hydro were fixtures.

32. In the present case, the turbines and other equipment form part of an electricity generation system, which utilises the natural benefits of the land - the wind - and uses other components affixed to the land to convert the wind energy to electricity and transmit that energy ultimately to the substations and switching station. While it is acknowledged that the land is concurrently used by the landlords for grazing, the two purposes are not incompatible.

33. However, the fact that D Co and W Co (i) install the Wind Farm Assets in their capacity as tenants with respect to their leases, (ii) pay for these assets, (iii) affix them demountably, (iv) have an ongoing right to remove these assets and (v) have an obligation to remove them at the conclusion of the lease, collectively militate against any objective inference of permanent or indefinite annexation of the Wind Farm Assets.

Effect of Statute

34. In Commissioner of Main Roads v North Shore Gas Company Ltd (1967) 120 CLR 118, the High Court accepted that a statute which deems gas mains and pipes to belong to the authority which might otherwise be fixtures to be chattels.

Differences of opinion from time to time have arisen concerning the true meaning and operation of the principle expressed in the maxim quicquid solo plantatur, solo cedit (see e.g., Wake v. Hall (1883) 8 App Cas 195), but, primarily, it is applied to determine the right of the owner of land to things affixed to or embedded in the soil. Whatever is fixed to the freehold is said to become part of it and is subjected to the same rights of property as the land itself (Woodfall's, Landlord and Tenant, 24th ed. (1939), p. 749). The presumption is said to be rebuttable and, it seems to us, it must be so when a statute empowers someone other than the owner of land to affix to or embed things in the soil and yet retain ownership of the things so affixed or embedded.

35. This decision was followed in the decision of Anthony v Commonwealth of Australia (1973) 29 LGRA 61 in relation to telephone lines and electricity infrastructure erected on land resumed by the Commonwealth in the Northern Territory.

36. Relevantly, in Victoria, former section 28(2) of the Landlord and Tenant Act 1958 (LTA 1958), which is now contained in section 154A Property Law Act 1958, provides that a tenant who installs or improves "fixtures" has an ongoing right to remove those items until the end of the lease. The effect of the provision, as explained by Ormiston JA (with whom Phillips and Calloway JJ agreed) in Vopak Terminals Australia Pty Ltd v Commissioner of State Revenue [2004] VSCA 10 (Vopak) is to deem fixtures annexed by a tenant to be chattels:

…tenant's fixtures (of the widest description, whether trade, ornamental or whatever) do not become property of the landlord and thus part of the realty, but remain chattels capable of removal at any time by the tenant and incapable of being dealt with by the landlord as part of the land, until the tenant has departed.

37. In Vopak, the assets were held not to be fixtures. Former section 28(2) of the LTA 1958 was found to alter the position at common law by holding that 'chattels affixed by tenant do not immediately become part of the realty' but rather that a failure to remove the chattel prior the tenancy ending 'will result in the item becoming attached permanently to the soil so as to form part of the realty thereafter'.

38. In South Australia, the tenant is an "electricity entity" within the meaning of the Electricity Act. Under section 36A of that Act, the ownership of electricity assets affixed to land by an electricity entity is deemed not to be affected by the affixation or annexation of the assets to the land.

39. In the States where the Wind Farm Assets are located, these provisions, respectively, have effect to ensure ownership remains with the affixer notwithstanding the annexation. If ownership remains with the tenant, then the Wind Farm Assets have not become part of the land and ought to be characterised as chattels.

40. It follows that the Wind Farm Assets have not become part of the land and do not give the taxpayer an interest in land. Consequently, they are not 'taxable Australian real property' for the purposes of section 855-20 of the ITAA 1997.

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