INSIGHT

A tale of two courts: are wind farm assets fixtures or chattels?

By Michael Graves, Adrian Chek, Jay Prasad, Zainab Mahmood
Banking Energy Property & Development Renewables Tax

Implications for the renewable energy industry 9 min read

Wind farms and other renewable energy sponsors should be aware of two recent decisions of the Supreme Courts of Victoria and New South Wales, which have raised doubt over whether wind farm assets are chattels or fixtures.

We briefly explore the key findings of each court and consider some broader repercussions of these decisions for the renewable energy industry.

Key takeaways

  • While the Supreme Court of Victoria held wind farm assets to be chattels in the December 2020 decision of AWF Prop Co 2 Pty Ltd (as trustee) v Ararat Rural City Council (AWF Decision),1 this finding was contradicted by its New South Wales counterpart in the April 2021 decision of SPIC Pacific Hydro Pty Ltd v Chief Commissioner of State Revenue (SPIC Decision).2
  • Owners of wind farms and other renewable energy projects should have regard to both decisions when considering the tax implications of their investment, particularly for foreign resident investors determining whether Australian capital gains tax would be payable on a future sale of their interest in a project.
  • The SPIC Decision is also important for the approach to valuing wind farm assets based on a 'profit rental' methodology.

Summary of the AWF Decision

This case considered whether wind farm assets, brought onto leased land by the tenant wind farm company Ararat Wind Farm (AWF), were chattels or fixtures, and ought to be included when calculating the Capital Improved Value (CIV) of the leased land for the purpose of rates assessments under the Valuation of Land Act 1960 (Vic).

AWF, which had commenced the proceedings, objected to the CIV assessment provided in the rates notice issued to it by the local council on the basis that it was too high (since it incorrectly included the value of its wind farm assets). AWF contended the CIV of the leased land should instead be the same as the site value of the land.3 The Valuer-General Victoria, the respondent in the proceeding, maintained that the wind farm assets, as fixtures, were correctly included in the calculation of the CIV.

The assessment of CIV had wider commercial implications for both parties, as the Fire Services Property Levy (FSPL) payable by AWF to the state government was calculated using the CIV – the higher the CIV, the higher the FSPL.

The Supreme Court of Victoria found in favour of AWF and held that the wind farm assets were chattels, not fixtures, under the common law doctrine of fixtures, which requires consideration of the 'degree of annexation' – ie the extent to which assets are affixed to the land, here the assets being firmly affixed to the leased land; and 'the object of annexation' – ie the intention, objectively ascertained, of the relevant parties in fixing the assets to the land.

In finding the wind farm assets to be chattels, the court paid particular attention to:

  • the specific terms of AWF's leases, which provide for (among other things): a lease term of generally 25 years and an obligation on AWF to remove the turbines and other equipment at the end of the lease term; and
  • AWF's planning permits, which require (among other things) the removal of above-ground operational equipment when the wind farm is decommissioned.

The court concluded that this was compelling objective evidence that the parties did not intend for these assets to become part of the land to which they were firmly fixed.

In any event, even if they were fixtures, the court found that the effect of section 154A of the Property Law Act 1958 (Vic) was to exclude them from the hypothetical fee simple estate to be valued. In other words, the court found that the effect of section 154A was that the assets did not form part of AWF's land, and therefore, were not to be taken into account in assessing its capital improved value.

Summary of the SPIC Decision

This case, like AWF, considered whether wind farm assets brought onto leased land by a tenant wind farm company (in this case, SPIC Pacific Hydro Pty Limited (SPIC)), were chattels or fixtures – this time, for the purpose of determining SPIC's liability to landholder duty under the Duties Act 1997 (NSW) arising from its acquisition of a 100% interest in Taralga Holding Land Trust which indirectly held land that was used for the operation of the Taralga Wind Farm.4

Despite the factual similarities between the two cases, the NSW court, in stark contrast to the Victorian court, held that the wind farm assets affixed by SPIC to its leased land were fixtures, not chattels, at common law.

Interestingly, while the court distinguished the case before it from the AWF Decision on the basis that the case 'addressed a different statutory regime',5 it then proceeded to query the Victorian Supreme Court's application of the common law doctrine of fixtures and, in particular, the degree of weight placed by that court on the terms of the wind farm company's lease and planning permit.

SPIC's leases enabled SPIC to occupy the land for a term of 30 years, and (like AWF's leases) allowed SPIC to remove the assets during the lease term and imposed upon SPIC the obligation to do so at the end of the lease. SPIC's development consent also required SPIC to submit a Decommissioning and Rehabilitation Plan. According to this plan, the dismantling process for turbines differed depending on whether the turbines are re-used, recycled or disposed of.

While the NSW court accepted that the terms of the leases and the development consent were relevant to assessing the assets as chattels or fixtures, the court disagreed with the 'determinative weight' that the Victorian court gave these factors in AWF.

From a valuation perspective, in the SPIC decision, the court assessed the market value of SPIC's interest in land broadly on the 'profit rental' as contended by the taxpayer (being the present value of the difference between the actual rent and the market rent, including the value of the improvements and fixtures, over the unexpired term of the lease) rather than on the market value of the plant and equipment, as the Commissioner contended.

How do we reconcile the two decisions and what are the implications?

While fixtures cases generally turn on their own specific facts, these two cases are still very difficult to reconcile. As the NSW Supreme Court noted, the cases deal with different statutory regimes, however, in our view, this has little bearing on each court's application of, and approach to, the common law doctrine of fixtures.

It would appear that the court in the SPIC Decision has adopted a more traditional, 'strict' application of the common law doctrine of fixtures, which places greater emphasis on the degree of annexation (rather than the object of annexation). On this analysis, where an item is affixed to a significant degree, it is prima facie a fixture.

However, this is not consistent with the modern trend in the cases. On this modern approach, the object of annexation is of greater importance than the degree of annexation, when assessing whether an asset is a fixture. In our view, the reasoning in SPIC therefore departs from the modern approach to the doctrine of fixtures.

It is also notable that the SPIC Decision relied on the decisions in National Dairies WA Ltd v Commissioner of State Revenue (2001) 24 WAR 70 (National Dairies) and Commissioner of State Revenue v Snowy Hydro Ltd (2012) 43 VR 109 (Snowy Hydro) where the courts considered as fixtures all equipment installed by the freehold owner of land as part of the long-term use of the relevant sites as integrated, special purpose-built commercial or industrial plant. In contrast, the Victorian Supreme Court in the AWF Decision distinguished Snowy Hydro on the basis that it concerned freehold (and not leasehold) land – and therefore the findings in that case were not relevant. The Victorian Supreme Court also did not consider the decision in National Dairies.

The characterisation of wind farm assets as fixtures may have important tax consequences for particular taxpayers:

  • Australian 'capital gains tax' for foreign residents – a foreign resident can generally disregard a capital gain or loss made on the sale of an asset that is not 'taxable Australian property', which is relevantly defined to include 'real property situated in Australia'. Foreign residents, therefore, investing in renewable energy projects in Australia will need to consider whether a future sale of their interest in a project would be subject to Australian capital gains tax on the basis of the SPIC Decision's characterisation of the wind farm assets as fixtures (and therefore, 'real property') and not chattels. Notably, the SPIC Decision is contrary to the position taken by the ATO in a series of private binding ruling decisions on whether certain wind farm assets were 'taxable Australian property' (the ATO determined that they were not 'real property situated in Australia' for income tax purposes).
  • Trading Trusts – the characterisation of wind farm assets as fixtures or chattels may also be relevant to determining whether a trust is carrying on a 'trading business' for tax purposes, which in general and relevant terms requires that the business of the trust must consist only of investing in 'land' primarily for the purpose of deriving rent. This question is relevant, for example, to determining whether a trust can qualify under the concessional 'managed investment trust' tax regime.
  • Transfer duty and landholder duty – the decisions should be of little significance for stamp duty purposes in the majority of Australian jurisdictions because they have extended the meaning of 'land' to include anything 'fixed to land' (regardless of whether the item constitutes a fixture at general law). This has therefore largely removed the need to apply the general law tests of the fixture / chattel distinction to determine the liability to transfer duty or landholder duty.
  • Increased council rates and levies for landowners – As council rates and levies are determined based on the capital improved value of the land (which include fixtures on the land), the classification of major assets as fixtures on the land can increase a landowner's liability to council rates and levies.

The Valuer-General has filed an appeal in relation to the AWF Decision. While the Victorian Court of Appeal is yet to hear the matter, it will be significant to see how the appeal court responds to and reconciles the conclusions reached by the first instance AWF Decision and the later SPIC Decision.

At the time of this publication, we understand that no notice of appeal has been filed in respect of the SPIC Decision.

Footnotes

  1. [2020] VSC 853.

  2. [2021] NSWSC 395.

  3. [4] AWF Prop Co.

  4. [100] SPIC.

  5. [100] – [101] SPIC.