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Date of advice: 24 February 2016
Ruling
Subject: Taxable Australian Real Property
Question 1
Are the Wind Generation assets held by ABC '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.
Relevant facts and circumstances
Background
Green Limited
1. Green Limited ("Green") is a non-resident company for Australian tax purposes.
2. Green is primarily involved in the electricity generation business. Green's electricity generation is sourced from renewable energy sources, namely hydro-electric power and wind power.
3. Green wholly owns Blue Pty Ltd, a non-resident company which predominantly undertakes renewable electricity generation from wind farm assets and hydro-electricity assets in Australia.
Blue Pty Ltd
4. Blue Pty Ltd owns 100% of the ordinary shares in ABC.
5. ABC is an Australian resident for tax purposes.
6. Blue Pty Ltd has held its interest in ABC for more than 12 months.
7. The principal activity of ABC is the development, ownership and operation of the Wind Farm in Australia.
8. ABC is an 'electricity entity' under the relevant State Electricity Act.
9. Blue Pty Ltd also holds 100% of the shares in a number of other Australian resident companies.
The Wind Farm assets
10. ABC holds the following assets which comprise the Wind Farm:
a. Wind Generation assets, consisting of a number of components, including:
i. rotor component, which consists of 3 blades and a hub;
ii. nacelle component, which houses the main components, including the generator, control electronics and gearbox;
iii. wind turbine transformers and switchgear, which may be housed inside the tower or nacelle, or located adjacent to the wind turbine on a foundation; and
iv. the structural support component, which comprises the supporting tower and internal fittings and equipment.
b. Control and communications equipment located both within the wind turbines and in the substations.
c. Civil works, which includes the access roads and concrete foundations supporting the turbines.
d. Transmission assets, which consists of the transmission cables (overground and underground) and distribution lines, poles and pylons.
e. Substation assets.
The Wind Generation assets
11. The Wind Generation assets (also referred to as 'wind turbines') are large assets, with the wind turbines standing at 80 metres in height.
12. Each wind turbine is erected in the following sequence:
a. The tubular steel tower is first erected (depending on the wind turbine, the towers are assembled using a number of sections).
b. Secondly, the nacelle, which houses the gearbox, generator, WTG controller and other ancillary equipment, is installed on top of the tower.
c. Once the nacelle is in place, the rotor is assembled (the 3 blades are attached to the hub) and then connected to the nacelle. The blades that are attached to the hub range from 43 to 53 metres in length.
13. Each of the above components is typically delivered individually to each wind farm location for assembly and erection of the wind turbines. Some other items such as the WTG transformer may be delivered separately also and installed either prior to, or following erection of the WTG depending on configuration.
14. To support the wind turbines, the towers are bolted onto concrete pad foundations using 150 to 180 high tensile bolts. The concrete pad foundations are between 16 to 18 metres in diameter, with a depth of up to 3 metres. Although the wind turbines are attached to the concrete foundations, they are treated as separate assets (i.e. under civil works) to the wind turbine and supporting tower on the fixed asset register of ABC.
15. ABC's wind farm utilises two different foundation types depending on localised ground conditions - a gravity / mass pad foundation comprising of a large volume of steel and concrete or a rock anchor type which consists of a smaller pad with anchors or tendons grouted into the substrata (rock) below.
16. The turbines are also connected to the wind farm's distribution network consisting of both overhead and underground transmission cables and distribution lines. The distribution lines run into a substation located onsite, which serves to 'step-up' the voltage and facilitate connection to the network service provider's transmission system.
17. The wind turbines have an estimated life of 20-25 years.
18. As part of the typical maintenance of these assets, the turbine rotor, individual blades and nacelles are able to be removed from the tower, taken offsite to be fixed (if required), or moved to another tower or replaced without damage.
19. The wind turbines and towers are designed and intended to be demountable for the purpose of being moved, removed or sold on a second hand market. Depending on weather conditions, it takes approximately 3 to 5 days to install the wind turbines on top of the prepared concrete pad and a similar timeframe to remove the turbines.
20. The purpose of bolting the wind turbines and towers to the concrete foundations is to ensure the safe operation of the turbine.
21. There is an active global secondary market for wind turbine assets, and accordingly they are designed so that they can be disassembled and removed from a site without damaging the wind turbines and towers.
Land arrangements
22. The wind turbines are situated on land leased by ABC on a commercial basis.
23. Under the Lease Agreement:
a. ABC has the exclusive right to occupy and use the land for the installation, removal, operation and maintenance of the wind turbines and all associated equipment.
b. ABC will maintain ownership of all the wind turbines installed, erected, constructed or placed on the land, including in the case where, despite the intention of the parties, the wind turbines becomes fixtures.
c. ABC shall carry out all works with as little disturbance as possible to the Lessor's permitted farming activities, mining activities and livestock and with as little damage as possible to the surface of the land and other pastures.
d. Upon cancellation, surrender or termination of the lease, ABC is required to remove from the land all its equipment, repair all damage caused by the removal and restore the surface of the land (including remediating the soil to a depth of not less than 0.6 metres) to a suitable condition for pastoral or other agriculture use, having regard to the condition and use of the land prior to the installation of the wind turbines.
e. The amended term of the lease agreement is approximately 27 years which includes the time taken to construct the wind turbines (approximately 2 years).
f. ABC has the option to renew the lease for a term of 25 years from the end of the initial term at the request of ABC.
g. The Lessor has a licence to use the leased land (other than the areas which house the wind turbines) for farming activities, mining activities and such other activities as granted by ABC, provided it does not interfere with ABC's wind generating activities.
h. ABC also has a right to purchase a portion of the land for the purpose of building substation assets (rather than purchasing corridors on which the turbines are situated).
24. The decommissioning of the wind farm is also subject to the terms and conditions of the local council planning approval granted to ABC. In particular, the council approval provides that ABC must remove the Wind Generation assets from the land following the cessation of their use.
Proposed demerger
25. Following a strategic review of its activities, Green is currently proposing a demerger of its wind and solar businesses by way of a court approved scheme of arrangement.
26. The proposed demerger will effectively split the wind power business and hydro-electric business in order to create business efficiencies and be attractive to shareholders.
27. Prior to the demerger, Green will undertake an internal restructure of Blue Pty Ltd so that:
a. ABC will hold all wind assets; and
b. all remaining assets (i.e. the hydro-electric assets) will be held by a new entity.
28. Blue Pty Ltd currently holds 100% of the ordinary shares in XYZ, an Australian resident company which owns and operates hydro-electricity generation assets.
29. The internal restructure will effectively involve the disposal of XYZ by Blue Pty Ltd to another Green subsidiary. The disposal will occur prior to the demerger.
30. Following the restructure, Green will undertake an in specie distribution of the shares in Blue Pty Ltd to the ultimate shareholders of Green.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 855
Reasons for decision
All legislative references set out below are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.
Question 1
Pursuant to section 855-20, a CGT asset is taxable Australian real property if it is:
The Wind Generation assets are CGT assets pursuant to section 108-5.
'Real property' is not defined in the ITAA 1997. Accordingly, the term should take its ordinary meaning as explained in the Explanatory Memorandum to Tax Laws Amendment (2006 Measures No. 4) Act 2006 at paragraph 4.28:
Taxable Australian real property generally refers to real property, within the ordinary meaning of that term…
Under the common law, real property broadly consists of land and interests in land, including fixtures.
There is a general rule regarding fixtures that is expressed in the common law maxim 'whatever is attached to the soil becomes part of it'. 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.
In determining whether or not the Wind Generation 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.
In National Australia Bank v Blacker [2000] FCA 1458, Conti J lists the following factors to take into account in determining the purpose of annexation:
• Whether the attachment was for the better enjoyment of the property generally or for the better enjoyment of the land and/or buildings to which it was attached.
• The nature of the property the subject of affixation.
• Whether the item was to be in position either permanently or temporarily.
• The function to be served by the annexation of the item.
Conti J identified the following factors relevant to the degree of annexation:
• Whether removal would cause damage to the land or buildings to which the item is attached.
• The mode and structure of annexation.
• Whether removal would destroy or damage the attached item of property.
• Whether the cost of renewal would exceed the value of the attached property.
These two factors can overlap and are discussed below:
Degree of Annexation
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 (Coroneo)). The greater the degree of annexation, the less likely the object of annexation will rebut the presumption and vice versa.
It is clear that the Wind Generation assets are attached to the land by more than their weight alone. The turbine towers are bolted to concrete foundations (or "pads"), which are embedded in the soil for the safe operation of the turbines. In the case of the turbine towers, they are secured by 150 to 180 high tensile bolts and are connected to the wind farm's distribution lines which are routed underground.
It is also observed that the towers themselves are extremely large. However, the turbine towers are designed to be demountable (albeit that it may take a number of days to dismantle and remove the towers).
The concrete foundations ought to be considered separately from the equipment mounted on those foundations. Although both are installed by the tenant for the use of the tenant, the tenant can deal with the concrete foundations at the end of the lease in a manner different to other equipment. The concrete foundations may be covered, whereas the equipment must be entirely removed from the land. Moreover, most of the equipment is designed to be demountable from the concrete footings, thereby not causing damage, whereas the removal of the concrete foundations would cause extensive damage.
The towers are clearly detachable from the embedded foundations without causing damage, by undoing a series of bolts. Due to the value of the Wind Generation assets and the existence of a secondary market, it is economical to remove the assets when the circumstances favour removal, notwithstanding the cost, the time and the equipment required, to, remove them.
Having regard to the size and connection of the turbines to the land, it might reasonably be said that the Wind Generation assets have substantial degree of annexation to the land (notwithstanding their removability).
The burial and/or bolting of the equipment also indicate greater connection to the land than merely the weight of the items. Therefore, the degree of annexation points to the rebuttable presumption that the Wind Generation assets are fixtures.
Object of Annexation
The second factor requiring consideration is the affixer's object of annexation at the time of annexation.
It is clear that the wind turbines have been erected on the land by ABC for the purposes of operating a wind farm business. Under the Lease Agreement, ABC has the right to occupy and use the land for the installation, removal, operation and maintenance of the wind turbines.
Although the lease terms (including the tenants' renewal entitlements) are for duration in excess of the effective life of many of the component parts of the turbine towers, there appears to be a real and ever-present capacity to relocate the equipment from time to time as may be necessary. The items are mounted on foundations from which they may be detached without damage to either the assets or the land.
The objective intention appears to be supported by the terms of the Lease Agreement, whereby it is mutually understood that the Wind Generation assets remain the property of the tenant; the tenant has the ongoing right to remove the assets and is required to remove all assets (with the exception of the concrete foundations, which it may bury), at the conclusion of the lease and restore the surface of the land to a suitable condition for pastoral or other agricultural purposes, having regard to the use of the land prior to the installation of the wind turbines.
The conditions of the council planning approval also require ABC to remove the wind turbines and 'make good,' the land upon cessation of the use of the turbines.
To this end, an ongoing right to remove the assets during the lease and an obligation to remove the assets at the end of the lease were features that 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.
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.
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.
More recently, in Agripower Australia Ltd v J & D Rigging Pty Ltd and Ors [2013] QSC 164 (Agripower Australia), the nature of the affixer's rights in relation to the land (i.e. the status of the affixer), together with obligations under State law to remove equipment at the end of the lease led the Court to consider certain mining equipment to be chattels.
Status of affixer as tenant
The status of the affixer of the object to the land is a relevant consideration in relation to the object of annexation.
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)).
This was a relevant factor in the Commissioner of State Revenue v Snowy Hydro Ltd [2012] VSCA 145 (Snowy Hydro), where it was held that six gas turbine generators affixed to the land were found to be fixtures. Evidence indicated that the freehold land was acquired by the taxpayer with the intention of indefinitely dedicating the land for use as a power plant. The fact that the affixer was the owner of the land was a prominent feature in the conclusion that the objective intention was that the assets had become fixtures.
It is expected, however, that where a tenant is the affixer of an asset under a lease, the longer the lease, the greater benefit the tenant may derive from a fixture and the less compelling the objective inference that the tenant, as a tenant, does not intend the asset to be affixed such that it forms part of the land.
These leases can potentially be extended to 52 years, in excess of the effective life of many of the component parts of the turbine. It is therefore likely that the concerns that the tenant would not want to gift the asset to the landlord should not carry much weight. However, the legal obligation to remove the assets at the end of the tenancy (imposed by the council) confirms that the Wind Generation assets are not intended to benefit the land beyond the tenant's occupation.
It would not accord with ordinary expectation that the landlords, who use the rest of the land for agricultural purposes, would expect to obtain the benefit of the Wind Generation assets following the departure of the tenant.
Evidence of subjective intention
The subjective intention of the parties may also be a relevant consideration as to the ascertainment of the objective purpose of annexation.
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.
In Agripower Barraba Pty Ltd v Blomfield [2015] NSWCA 30, the Full Court of the Supreme Court of NSW (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.
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.
To this end, the Lease Agreement sets out the intention of the parties whereby it is mutually understood that the Wind Generation assets belong to the tenant and are to be removed at the end of the lease.
To the extent that subjective intention can be relied upon as evidence, it strongly points to the characterisation of the Wind Generation assets as chattels. However, although the subjective intention may inform the factual matrix in which the Wind Generation assets were erected, subjective intention cannot serve as a substitute for the objectively-discernible object of annexation.
Better use of the land or the object
Another relevant factor is whether the affixation occurred for the better use of the object or for the better use of the land (Coroneo at 712). It is accepted that the wind turbines have been fixed to secure their safe operation and ensure that the assets will not move out of position during operation.
However, it must also be noted that the locations where the towers are bolted are dictated by making the best use of the natural resources of the land. In other words, the turbines are bolted to particular land which has been chosen because of its particular suitability (it receives 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). While the circumstances of affixation are about securing and stabilising the turbines for safe and efficient operation, the location of affixation is about the best use of the land as a wind farm.
It is also potentially relevant that the landlord uses the farm land on which the towers are located for grazing and cropping. The Wind Generation assets are evidently not annexed for this purpose. However, they 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. These purposes are not incompatible and the relevant purpose is that of the affixer, and on that basis, the 'integrated system' line of reasoning ought to be considered.
Integrated system
Jurisprudence suggests that 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).
In National Dairies (WA) Ltd v Commissioner of State Revenue [1999] WASCA 152 (National Dairies) 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.
Similarly, in Snowy Hydro, despite the fact that the gas turbines were able to be removed with relative ease without damage to the land, the turbines were found to be fixtures. The turbines were installed by the owner of the land 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.
In the present case, the turbines are connected to the transmission assets to 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.
However, the fact that ABC installs the Wind Generation assets in their capacity as tenants with respect to their leases, pay for these assets, have an ongoing right to remove these assets and have an obligation to remove them at the conclusion of the lease militate against any objective inference of permanent or indefinite annexation of the Wind Generation assets.
Conclusion
On balance, the circumstances indicate that the objective intention of the affixer is that the Wind Generation assets do not become part of the land. Accordingly, the Wind Generation assets should be characterised as common law chattels.
Despite their significant size, the Wind Generation assets are affixed for stabilisation purposes, are removable without damage, are economic to remove and are placed on leased land where they are required to be removed at the end of the lease, remaining the property of the tenant and able to be removed throughout their period of affixation.
Because it is considered that the Wind Generation assets are chattels at common law, there is no need to consider whether any statute might affect their characterisation.