Power generators held to be fixtures

Commissioner of State Revenue (Vic) v Snowy Hydro Limited [2012] VSCA 145

Summary

In this decision, the Victorian Court of Appeal (the Court) unanimously held that gas turbine generators, installed on land as part of an electricity power station, were fixtures for the purposes of the ‘land rich’ duty regime.

Background

(a) The acquisition and joint venture

In 2005, Snowy Hydro Limited (the Taxpayer) acquired 100% of the shares in La Trobe Valley BV (LVBV). At the time of the acquisition, Valley Power (VP), a wholly owned subsidiary of LVBV, owned land in Victoria upon which an electricity power station was situated.

The power station was operated pursuant to a joint venture agreement (the JVA) between VP and Contact Peaker Australia (CP). Under the terms of the JVA, VP had a 60% interest in the joint venture and CP had a 40% interest.

The power station assets consisted of the land, six gas turbine generators (the Generators) and other plant and equipment. VP was the legal owner of the land and the Generators and pursuant to the JVA agreed to lease two of the Generators to CP. Under the JVA, both parties then agreed to make these assets available exclusively for the purposes of the joint venture.

One of the key issues in contention before the Court was whether the Generators were properly characterised as fixtures or chattels – the significance being that if the Generators were fixtures, then they were to be valued as part of the land (whereas, if they were chattels, then they would be valued separately from the land).

The Commissioner determined that the Generators were fixtures and therefore that LVBV was ‘land rich’ at the time of the acquisition. The Commissioner then assessed duty and penalty tax on the transaction. The taxpayer appealed to the Supreme Court.

(b) The ‘land rich’ formula

The primary question for determination was whether LVBV was ‘land rich’ at the time that it was acquired by the taxpayer. LVBV would be ‘land rich’ if the land owned by VP represented 60% or more of the unencumbered value of all of VP’s property. This can be expressed mathematically as follows:

( L / P ) x 100 = 60%

Where L, the numerator, was the value of all of the land owned by VP, and P, the denominator, was the value of all of VP’s property (including the land).

Decision

In a unanimous decision (Maxwell P, Redlich JA and Robson AJA), the Court allowed the Commissioner’s appeal and reinstated the duty assessment on the basis that LVBV was ‘land rich’ at the time of the acquisition.

In reaching its decision, the Court considered a number of issues, including the following:

(c)  Were the Generators fixtures or chattels?

The Generators took up approximately one-third of the power station site. Each generator was housed in a separate module enclosure (Modules) which rested on top of a concrete foundation. The Modules were mounted onto a steel frame that was bolted to the foundation through metal plates. It was accepted that the bolting of the Generators was necessary to hold the machinery in place to prevent movement caused by vibrations.

It was also accepted that the use of bolts made it relatively simple to remove the Modules by crane without causing damage to the other Modules or the land. Each generator could also function independently such that the removal of one unit would not impair the generation capacity of the other units. The Generators had also been bought second-hand from two sites in New Zealand, and they had been disassembled, shipped to Australia and then reassembled at the power station. The taxpayer argued that these were all strong features which indicated that the Generators were chattels, despite the fact that they were bolted to the ground.

The Court rejected the Taxpayer’s arguments and held that the Generators were fixtures. The question of whether a chattel has become a fixture depends upon ‘whether the circumstances, viewed objectively, evidence an intention on the part of the owner that the item should remain permanently on the land’.

The Court had regard to the circumstances of the case, including:

  • that the power station had been specifically designed to accommodate the 6 generators;
  • that the power station and generators were designed to have a long life (i.e. at least 25 years);
  • that the generators were not ancillary pieces of equipment but rather the core means by which the electricity was generated at the power station; and
  • the lack of evidence suggesting that VP considered relocating or selling the Generators during the life of the joint venture.

In light of these factors, the Court held that ‘it was abundantly clear’ that the Generators were intended to be installed on the land ‘for the long term use of that site as a gas turbine electricity generation plant’. Accordingly, the Court determined that the Generators were fixtures and should be valued as part of the land.

(d) Should the value of VP’s interest in the land be reduced due to CP’s rights under the JVA?

The Court held that there was nothing in the JVA that evinced an intention by the parties to transfer 40% of the land to CP (i.e. VP was entitled to 100% of the land). In fact, VP had only granted CP a right of ‘use and occupation’ of the land and no more. Although the JVA provided that the proceeds from the sale of the power plant would be split between CP and VP in accordance with their respective joint venture interests, this alone was not sufficient to indicate that the parties had intended to transfer 40% of the land to CP. Accordingly, the Court held that CP did not have an equitable interest in the land and therefore, the land should be included at full value in the ‘land rich’ formula.

Duty and penalties

Based on the above calculation, the Court concluded that LVBV was ‘land rich’ at the time of the acquisition and therefore the transaction was dutiable.

However, the Court remitted the penalty tax on the basis that the taxpayer had taken reasonable care to comply with the law (including obtaining legal advice and seeking a private ruling from the Commissioner).

Implications of this decision

It is important to note that as of 1 July 2012, Victoria replaced its ‘land rich’ duty regime with a ‘landholder’ duty regime. Accordingly, the duty regime to which this decision pertains is no longer in force.

Under the current ‘landholder’ duty regime, duty is assessed on the acquisition of certain threshold interests in a target entity that owns land in Victoria with a market value of $1 million or more (i.e. regardless of whether the land represents 60% or more of the target entity’s total assets, which was required under the old ‘land rich’ formula). The adoption of the ‘landholder’ model brings Victoria in line with all other Australian states and territories (with the exception of Tasmania). The definition of ‘land’ under the Victorian duties legislation has also been expanded, to include anything fixed to land, whether or not the item is a fixture at law.

Although the Snowy Hydro decision concerns the old ‘land rich’ regime, it provides an indication of how the Court will approach the issue of determining whether an item is a chattel or a fixture, in particular, the variety of factors that the Court will take into account for this purpose. Where assets are fixed to land with the intention that they remain on the land for a long period (despite the fact that they can be unbolted and removed without much difficulty), this decision suggests that a Court may be more inclined to find that the assets are fixtures rather than chattels.