Edited version of your written advice

Authorisation Number: 1051354882115

Date of advice: 5 April 2018

Ruling

Subject: Withholding tax in relation to electricity generators

Question 1

Is the taxpayer an entity bound by and subject to withholding obligations under Subdivision 12-FB and / or Subdivision 14-D of Schedule 1 to the Taxation Administration ACT 1953 (TAA 1953)?

Answer 1

Yes

Question 2

If the answer to question 1 is yes, is the taxpayer an entity ‘that carries on an enterprise’ for the purposes of section 12-315 of Schedule 1 to the TAA 1953?

Answer 2

Yes

Question 3

If the answer to question 2 is yes, are the payments to be made by the taxpayer to the second party pursuant to the Call Option Deed or Asset Sale Contract ‘of a kind set out in the regulations’ for the purposes of section 12-315(1)(b) of Schedule 1 to the TAA 1953?

Answer 3

No

Question 4

If the answer to question 1 is yes, are the Generation Assets ‘taxable Australian real property’ for the purposes of section 14-200(1) of Schedule 1 to the TAA 1953?

Answer 4

No

This ruling applies for the following periods:

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Background

Y was selected to contract with the taxpayer to provide the generators and associated infrastructure (Generation Assets) at the locations identified and procured by X. The Generation Assets are located on properties leased by X from third parties. The generators are, by reason of their emergency duty, permanently in a highly transportable form. The generators sit on wheeled trailers, are able to be hooked up and transported elsewhere on short notice. The generators can be transported via land, sea and air, while their mobile nature means that they can be swiftly deployed to other sites within days when they are no longer required at their original site..

During the initial period the short term generators will be used primarily to avert a blackout by being able to be urgently dispatched to address an electricity shortfall of up to 200MW.

During this initial period, the generators will be fuelled by diesel. Diesel is, by its nature, a highly dense fuel. The generators can be run up to full capacity and then maintain that capacity for a relatively prolonged period as long as the diesel supply is replenished. That replenishment is achieved by having a substantial holding facility where the generators are located and having trucks on standby to deliver diesel to replenish those holding tanks. Given the nature of blackouts and the natural conditions which cause them (generally short term heatwaves), it would not be expected that the short term generators would operate longer than 1 – 6 hours at a time, although contingency arrangements are in place to enable them to operate for 2 days at a time if required.

The particular purpose for which these generators would be used will change. There is still the possibility of emergency use to avert blackouts, but it is also likely that that use would include acting as a peaking generating unit. In that dual capacity, there is no specific requirement that diesel would be the fuel that is used. For environmental reasons, it is preferable to use gas as the source of fuel. But, as noted above, that means that if the units are run at full capacity, then this will diminish the immediately available gas supply and potentially reduce the capacity of the generators.

For these reasons, in this first phase where the fuel is exclusively diesel, the locations of the generators have been selected primarily to facilitate the use of the generation. In other words, where the generators are most effective to avert a blackout.

In the second phase, after the initial period, the focus is on obtaining access to a high pressure gas transmission pipeline which will enable gas to be provided to the generators and to be maintained at a high volume / pressure in order for them to operate effectively as peaking units.

The other timing issue is that, after the initial period, the taxpayer will need to obtain its own license to operate these generation facilities if it does not negotiate an extension to the current suite of agreements with the other parties. In those circumstances, the contracting structure changes in that:

● the taxpayer will become the licensed generator; and

● the taxpayer identifies the optimal location for these generators given their broader role.

In those circumstances, it will be up to the taxpayer’s owner to find appropriate locations for the generators which are near a high pressure gas transmission pipeline and which are close to either the transmission or distribution networks in order to minimise line losses. This will almost certainly be a different location to where the Generation Assets are currently located.

Contractual arrangements

Under the Short Term Capacity Contract (STCC), the taxpayer contracted with X to install and commission the Generation Assets and supply electricity from them for a 13 month period (with a potential extension of up to 12 months) in return for monthly payments from the taxpayer.

Under the Short Term Capacity Supply Contract (STCSC), X subcontracted with Y to install, commission and operate the Generation Assets in order to satisfy its obligations to the taxpayer under the STCC.

As previously noted, X leases the sites on which the Generation Assets are located. X in turn licenses the sites to Y.

The Generation Assets are owned by a related company of Y (Z), which leases the Generation Assets to Y under the Equipment Retail Agreement.

The taxpayer entered into a Call Option Deed with Z, pursuant to which the taxpayer was granted an option to purchase the Generation Assets exercisable at any time from when they were commissioned until the end of the arrangements between the taxpayer and Y.

Pursuant to clause 12.1(c) of the Call Option Deed (and clause 11.1(c) of the associated Asset Sale Contract), if any withholding tax or deduction applies to the payments to be made by the taxpayer to Z for the Generation Assets, the taxpayer must pay an additional amount to Z so that its net receipt is the same as that which would apply if no tax was required to be withheld or deducted.

The Call Option was exercised by notice given by the taxpayer to Z. Completion of the sale and purchase of the Generation Assets will occur after the end of the arrangements between taxpayer and Y.

Land leases

The lands are the subject of 3 year leases (with rights of renewal for an additional term for the first lease).

The First lease

At clause 1.13, the First lease provides that “Permitted Use” of the land means the installation and operation of an electricity generation plant including without limitation, Connection Infrastructure and associated fuel storage infrastructure. Connection infrastructure means the infrastructure owned by the Lessee and situated on the Land or the Adjoining Land which connects the Lessee’s electricity generation plant on the Land with the electricity distribution network (but excludes the electricity generation plant).

Clause 6 of the First lease deals with alterations and improvements. Under clause 6.1, the Lessee is entitled with the prior consent of the Lessor (and subject to obtaining any necessary approvals from relevant authorities) to effect or construct alterations or improvements to the Land for the purposes of the Permitted Use. Subject to clause 9, all chattels and all Lessee’s fixtures and plant brought upon the Land or the Transmission Corridor by the Lessee shall remain the responsibility of the Lessee and must be removed by the Lessee at or before the expiration of the term (unless otherwise agreed in writing), provided that in effecting such removal the Lessee will make good any damage caused to the Land: clause 6.3

Under clause 9, the Lessee grants to the Lessor the right to purchase all or some of the Connection infrastructure on the expiration or termination of this Lease.

The Second lease

At clause 1.18, the Second lease provides that the Permitted Use means the installation and operation of an electricity generation plant including, without limitation, infrastructure to connect to the electricity distribution network and associated fuel storage infrastructure subject to the Lessee obtaining and in accordance with all necessary approvals, licences and permits.

Clause 6 of the Second lease deals with alterations and improvements. The Lessee is entitled with the prior approval of the Lessor (and subject to obtaining any necessary approvals from relevant authorities) to effect or construct alterations or improvements to the land for the purposes of the Permitted Use. All chattels and all Lessee’s fixtures and plant brought upon the Land by the Lessee shall remain the property of the Lessee and must be removed by the Lessee at or before the expiration of the Term provided that in effecting such removal the Lessee will make good any damage caused to the Land.

Generating equipment

The generating equipment comprises:

1. General Electric LM2500+G4 engines, each consisting of an aero derivative turbine engine that includes a six-stage power turbines,

2. Brush TM2500 GEN8 MGTG generators, each consisting of a Brush Model BDAX62-170ERT air cooled generator,

3. Broshuis Holland four-axle air ride suspension trailers with two tracking axles and a three-axle stinger,

4. Broshuis Holland two axle, air ride suspension trailers,

5. Broshuis Holland three-axle, air ride suspension trailers with two steerable axles used to transport the turbine trailer components,

6. JSHP 100/80/60 MVA 66/11.5 KV 3PH Step-Up Transformers

7. JSHP 40/35 MVA 66/11.5 KV 3PH Step-Up Transformer

8. High Voltage Switchyards

9. Medium Voltage Switchyards,

10. Auxiliary Transformers,

11. Auxiliary Standby Generators,

12. Containerised Storage Modules,

13. Containerised Toilet Modules,

14. Containerised Main Control Rooms,

15. Containerised Plant/Site Offices,

16. Containerised Canteen Modules,

17. RO-RO-EDI Water Treatment Skids,

18. Containerised Fuel Tanks,

19. Vertical Raw Water Tanks,

20. Vertical Processed Water Tanks,

21. Fuel Forwarding Skids, and

22. Fuel Offload Skids.

Asset Sale Contract

On Completion, Z agrees to sell, and the taxpayer agrees to buy, the Generation Assets free and clear of all Encumbrances on the terms and conditions of the Asset Sale Contract (clause 2.1 of the Asset Sale Contract).

The consideration for the Generation Assets is the Asset Sale Price (clause 2.2 of the Asset Sale Contract).

The Asset Sale Contract does not provide for decommissioning of the Generation Assets.

The taxpayer has gone to the market seeking proposals for the decommissioning and relocation (as well as subsequent operation and maintenance) of the Generation Assets.

Relevant legislative provisions

Section 2B Taxation Administration Act 1953

Subsection 3AA(2) Taxation Administration Act 1953

Subsection 12-315(1) in Schedule 1 to the Taxation Administration Act 1953

Subsection 14-200(1) in Schedule 1 to the Taxation Administration Act 1953

Section 855-20 of the Income Tax Assessment Act 1997

Subsection 995-1(1) of the Income Tax Assessment Act 1997

Regulation 33 of the Taxation Administration Regulations 2017

Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Question 1

Pursuant to law the taxpayer is a body corporate.

Subsection 12-315(1) in Schedule 1 of the TAA 1953 provides that an entity (the payer) that carries on an enterprise must withhold an amount from a payment it makes to another entity, or to entities jointly, in the course or furtherance of the enterprise if;

a. the entity receiving the payment, or any of the entities receiving the payment, is an entity covered by subsection (2); and

b. the payment is of a kind set out in the regulations and

c. the payment is not:

i. a dividend of a company; or

ii. interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936); or

iii. a royalty; or

iv. a departing Australian superannuation payment; or

v. a payment worked out wholly or partly by reference to the value or quantity of natural resources produced or recovered in Australia; or

vi. a mining payment; or

vii. an amount represented by or reasonably attributable to a fund payment; and

d. the entity receiving the payment is not covered by an exemption in force under subsection 12-319(1), or at least one of the entities receiving the payment is not covered by an exemption in force under that subsection.

Subsection 14-200(1) in Schedule 1 of the TAA 1953 provides that you must pay to the Commissioner an amount if:

a. you become the owner of a CGT asset as a result of acquiring it from one or more entities under one or more transactions; and

b. subsection 14-210(1) (about foreign residents) applies to at least one of those entities at the time one of those transactions is entered into; and

c. at that time, the CGT asset is

i. taxable Australian real property; or

ii. an indirect Australian real property interest; or

iii. an option or right to acquire such property or such an interest;

unless a transaction referred to in paragraph (a) is excluded under section 14-215.

The reference to an “entity” in section 12-315 in Schedule 1 to the TAA 1953 and to “you” in section 14-200 of Schedule 1 to the TAA 1953 extends to the taxpayer.

Question 2

A withholding obligation may apply under Subdivision 12-FB of Schedule 1 to the TAA 1953 if the taxpayer is “an entity (the payer) that carries on an enterprise.”

Subsection 3AA(2) of the TAA 1953 provides that an expression has the same meaning in Schedule 1 as in the ITAA 1997.

“Entity” is defined in subsection 960-100(1) of the ITAA 1997 as including a body corporate. The taxpayer is therefore a body corporate and an entity for the purposes of subsection 12-315.

“Carrying on” an enterprise is defined in subsection 995-1(1) of the ITAA 1997 as including doing anything in the course of the commencement or termination of the enterprise.

“Enterprise” is defined in subsection 995(1) of the ITAA 1997 as having the meaning given by section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999. Enterprise is defined in section 9-20 as including an activity or series of activities done by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory.

Accordingly, the taxpayer is carrying on an enterprise for the purposes of section 12-315 in Schedule 1 to the TAA 1953.

Question 3

Paragraph 12-315(1)(b) in Schedule 1 to the TAA 1953 imposes a liability to withhold an amount from a payment where the payment is of a kind set out in the regulations.

Regulation 33 of the Taxation Administration Regulations 2017 prescribes payments made under a contract entered into after 30 June 2004 for ‘works’ or ‘related activities’.

‘Works’ are defined to include the construction, installation and upgrade of buildings, plant and fixtures. ‘Related activities’ is defined to include activities associated with the construction, installation and upgrading of buildings, plant and fixtures.

Examples of related activities are the administration, assembly, de-commissioning plant, design, commissioning and operation of facilities, costing, engineering, erection, fabrication, hook-up, installation, project management, site management, supervision and provision of personnel, supply of plant and equipment, warranty repairs.

Taxation Ruling TR 2006/12 Income Tax: withholding on payments to foreign residents for works and related activities considers what constitutes a ‘payment under a contract entered into after 30 June 2004 (including payments to subcontractors) for works or related activities’ for the purpose of regulation 44C of the TAR 1976 (the predecessor to regulation 33 of the Taxation Administration Regulations 2017).

Paragraph 5 of TR 2006/12 states:

'Works' takes on its ordinary meaning as understood in the construction, infrastructure and resource sectors and specifically includes the construction, installation and upgrading of buildings, plant and fixtures (see the definition of 'works' in subregulation 44C(3)). That subregulation provides examples of what are considered works for the purposes of the regulation. The word 'plant' as used in the definition of 'works' in subregulation 44C(3) includes both fixed and moveable plant.

Paragraphs 8 and 9 of TR 2006/12 explain:

8. Included amongst the examples of what are related activities is 'supply of plant and equipment'. This does not include supply in the sense of an acquisition of plant and equipment by the payer from the payee. Rather it includes the use of plant and equipment in undertaking the works or related activities (for example, the use of the payee's bulldozer in undertaking earthworks). The use of things (such as equipment and consumables) by the payee in carrying out the works or related activities is part of those works or activities.

9. It follows that works or related activities do not include the acquisition by the payer of goods (like plant or equipment) that are not the product of works or related activities performed in Australia.

A single lump sum payment may be for both works and something else. Paragraph 11 of TR 2006/12 explains:

Sometimes a single undissected payment under a contract may be made in respect of both works or related activities and something else. In these cases, it will be necessary to determine the extent to which the payment is for works or related activities. That portion which can reasonably be related to the works or related activities is for those works or activities and therefore a prescribed payment for the purposes of paragraph 12-315(1)(b). Any payment apportioned to works or related activities must be reasonable having regard to all relevant matters, including the value of the things provided under the works arrangement.

Example 1 in paragraphs 17 to 19 in TR 2006/12 concerns the supply, installation and commissioning by an Indian firm of a brake press for a metal fabrication business operated by a resident company. Withholding would apply to the component of the ‘consideration under the contract that can be related to the installation and commissioning of the equipment’ but not ‘to the extent the payment reasonably relates merely to the purchase of the three modules.’

Application to the facts

The sale and purchase of the Generation Assets pursuant to the Asset Sale Contract will not give rise to any payment for “works or related activities” under Regulation 33 of the Taxation Administration Regulations 2017.

The Generation Assets have been installed at sites at the First and Second location. It is proposed to transfer the Generation Assets to a new site or sites close to gas supplies and electricity generation infrastructure. However, the Asset Sale Contract does not provide for the transfer of the Generation Assets to new sites.

The Asset Sales Contract does not provide for the decommissioning of the Generation Assets. The taxpayer has gone to the market seeking proposals for the decommissioning and relocation (as well as subsequent operation and maintenance) of the Generation Assets.

Accordingly, as the payments to be made by the taxpayer to Z pursuant to the Call Option Deed or Asset Sale Contract are not for works or related activities under Regulation 33, they are also not ‘of a kind set out in the regulations’ for the purposes of section 12-315(1)(b) of Schedule 1 to the TAA 1953.

Question 4

Taxable Australian real property is defined in section 855-20 of the ITAA 1997 as

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.

'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 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, 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 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. However, the Court should have regard to all the objective facts and circumstances (N Dunn Pty Ltd v L M Ericsson Pty Ltd (1979) 2 BPR 9241).

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). The greater the degree of annexation, the less likely the object of annexation will rebut the presumption and vice versa.

The following factors are relevant to determine the “degree of annexation” (National Australia Bank Limited v Blacker [2000] FCA 1458 at [13]) (Blacker):

● 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 removal would exceed the value of the attached property.

In this case, the Generation Assets are on moveable trailers and will not be directly attached to the land. Rather, the wheels on the trailer are locked and the Generation Assets are stabilised with a series of feet. However, the Generation Assets are connected by wires and pipes to other electricity infrastructure that is fixed to the land.

The Generation Assets can be removed easily, and without damage to the land. This would take place by disconnecting the Generation Assets from the electricity infrastructure. The Generation Assets are packaged on a two-trailer system so that they can be transported easily. They are designed specifically to be moveable; they are marketed as mobile gas turbines, and are kept permanently on wheels for quick transportation by land, sea or air to another location.

Overall, the degree of annexation is not sufficient to give rise to a presumption that the generation assets are fixtures. In any event, any presumption that may have arisen in relation to fixtures would be rebutted by the object of annexation of the Generation Assets.

Object of Annexation

The second factor requiring consideration is the object of annexation at the time of annexation. The following factors are relevant to determine the object of annexation as held in Blacker:

● 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.

Whether the item was to be in position either permanently or temporarily

The Generation Assets were imported into Australia to be used by X/Y for short term generation purposes (of 13 to 25 months) on land leased by X from independent parties and licensed by X to Y. The option to acquire the assets was exercised by the taxpayer. After the Asset Sale Contract is completed, the Generation Assets will ultimately need to be relocated due to the fact that the taxpayer does not have any leasehold or other rights to the land on which the Generations Assets are located, and in order to be closer to gas pipelines as this will become the intended source of energy for their operations.

The objective intention conveyed by the arrangement is that the Generation Assets were not intended to be in their current position permanently. It is mutually understood by the parties that the Generation Assets will need to be moved, and therefore must be in a condition that can be removed.

In Uniqema Pty Ltd v Commissioner of State Revenue [2002] VSC 157, the Court found that, despite the complexity of the relevant equipment, it was not a fixture. This decision was underpinned by a finding that the equipment was constructed to be removable [24], and that there was a ready market for the equipment. In this case, the Generation Assets are not only constructed to be removable, they are permanently trailer-mounted so that they can be transported simply by attachment to a vehicle. They are marketed as mobile gas turbines that can be swiftly decommissioned and installed at another site in a matter of days. This further supports that the Generation Assets were intended to be in position temporarily.

The nature of the property the subject of affixation

In Blacker, the nature of the land was held to be relevant to the general inquiry.

In this case the location where the Generation Assets are currently situated has access to diesel to fuel the Generation Assets. However, in the long term, it is more efficacious to use gas. This is relevant to the general inquiry that must be undertaken and an indicia that the Generation Assets were intended to be moved.

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

On our facts, the Generation Assets fall within the type of case whereby an item that is “fixed to the land” is not there with the intention of improving the land, but rather is attached to the land for the more effective use of the machinery (refer also to Cancer Care Institute of Aust Pty Ltd [2013] NSWSC 37 at 22). For effective use, the Generation Assets need to be connected to electricity infrastructure in order to supply electrical power, and fixed to the ground for stability. Therefore the affixation is a necessary incident of supplying electricity, and for the ‘better use’ of the Generation Assets.

In Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) [2017] NSWCA 8, four mobile gas turbine generators (turbines) were acquired by Power Rental. The turbines were affixed to the ground, being laid on concrete slabs and effectively bolted on to the concrete, and then connected to the electricity grid. In considering the question of whether the turbines were intended to become part of the land, Ward JA observed that despite the large scale nature of the power station, and the fact that it was operated by a statutory corporation to supply the growing electricity needs of the region, the evidence supported the conclusion that it was installed for a temporary purpose.

The factors relied on by Ward JA were the reversibility of the connection of the Turbines to the land, the terms of the Lease (which stipulated that the Turbines were leased by Forge Power from Power Rental Op Co, and to be returned after a relatively short period of time) and the temporary nature of the Power Station. In relation to the last point, the project was known as the ‘South Hedland Temporary Power Station,’ and it was only intended to remain in place for a short period, to meet increasing demand, when construction of a bigger power plant was to be completed. The court ultimately held that the Turbines were not fixtures.

On our facts, analogous factors such as the design of the Generation Assets, the short term nature of the contractual arrangements between the taxpayer and X (and, in turn, between X and Y), the terms of the Asset Sale Contract and the ultimate need to move the Generation Assets, all support the finding in this case that the Generation Assets are not fixtures.

The function to be served by the annexation of the item

As discussed above, the function to be served by the affixation in this case is to aid the running of the Generation Assets. This is similar to IN A-G (Cth) v R T Co Pty Ltd (No 2)(1957) 97 CLR 146 where printing presses were secured to a concrete foundry by nuts and bolts in order to keep the printing presses steady when in operation.

Conclusion

The object of annexation provides that the Generation Assets are not intended to be permanently affixed, and become part of to the land at the First location and the Second location.

The Generation Assets are chattels rather than fixtures and accordingly are not ‘taxable Australian real property’ for the purposes of subsection 14-200(1) of Schedule 1 to the TAA 1953.