Major road infrastructure projects involve the design, construction, operation and maintenance of a toll road. The private operator takes a lease of the road from the government for a set period. The key income stream from the project is derived from the right to levy and keep tolls. Accordingly, the tolling right is of critical importance to the viability of the project.
The Cross City Tunnel case
The nature and value of a tolling right has recently been considered by the Supreme Court of New South Wales in CCM Holdings Trust Pty Ltd v Chief Commissioner of State Revenue; CCT Motorway Company Nominees Pty Ltd v Chief Commissioner of State Revenue 6. The case involved a change in ownership of a motorway in Sydney funded by the private sector. The CCM group used a classic stapled trust/ company structure for the road. The structure was multi-tiered with a unit trust as the asset owning entity and a company as the operator of the toll road. In particular, the unit trust acquired a lease and the tolling right from the Roads and Traffic Authority and subleased them to the company. The CCM group had been placed into receivership and the relevant transaction essentially involved an acquisition by the taxpayer of the unit trust and company from the receivers.
At the time of the relevant transaction, stamp duty at approximately 5.5% was payable on the acquisition of a 50% or more interest in a “land rich” company or unit trust. A company or unit trust was land rich if it held land or interests in land with an unencumbered market value of 60% or more of the unencumbered market value of all of its property (subject to exclusion of certain property). A key issue in the case was whether the unit trust acquired by the taxpayer satisfied the 60% threshold. If it did, then duty was prima facie payable on 100% of the unencumbered value of the lease of the motorway land. The lease held by the trust was clearly an interest in land. A key question was whether the tolling right could be severed from the land lease and, if so, whether it was an interest in land and had any substantial value. The taxpayer argued that the tolling right was property in its own right separate from the lease, did not amount to an interest in land and had a significant market value.
The court held that the tolling right and land lease were inseparable parts of the composite whole and the tolling right was not therefore a separate item of property. It could not be acquired separately from the lease. All of the value was therefore attributable to the lease and to land. The 60% threshold test was satisfied.
Despite this finding, the court was asked to address the other issues raised. The court therefore provided additional insight. It commented that, if the tolling right was separate from the land it would not be an interest in land and it was not unreasonable for it to have a value at least equal to the value of the land lease. In other words, if the tolling right was a separate asset, then the trust would not have been land rich.
Implications for other projects
The court found that the tolling right was not severable because of, amongst other things, the wording of the relevant statute in New South Wales and the drafting of the suite of documents between the parties. It also held that the relevant tolling right was a statutory right, not a common law right. So while the decision is instructive as to the approach of the court, as the only jurisdiction considered in the case is New South Wales, the position could potentially be different for projects in other jurisdictions. In this regard, it can be observed that:
- The regimes for tolling rights in Australia are not uniform. Should the same issue arise in jurisdictions other than New South Wales the result will depend on the statutory scheme for levying tolls (if any) or if the right to toll arises under the common law rather than under statute, the common law;
- The outcome may be different depending on the drafting of the documents; and
- The concepts of “land” for stamp duty purposes vary in some respects between the different jurisdictions.
Relevance for present stamp duty regimes
Australia-wide, there is no longer a 60% threshold test for land rich duty (now called landholder duty) except in Tasmania. Instead, the thresholds range from any land to $2 million land in the jurisdiction. However, certain kinds of intangible property may not be included in the duty base for landholder duty if they are not land or an interest in land as a matter of law. Accordingly, the issue raised in the Cross City Tunnel case is still very relevant.
The Commissioner of State Revenue (Commissioner) has lodged a notice of intention to appeal the decision because the taxpayer ultimately won the case on another point. The court’s finding on the tolling right may therefore be considered afresh. Given that the project is again in receivership it is unknown whether the appeal will proceed because, even if the Commissioner wins the appeal, the Commissioner will stand as an unsecured creditor.
Although the case was confined to the stamp duty issues, it is also relevant from an income tax perspective.
First, capital gains tax (CGT) applies to a non-resident that disposes of an interest in a unit trust if the non-resident holds (or has for 12 months in the preceding 2 years held) 10% or more of the units in the trust (the portfolio test), and more than 50% of the assets of the trust are Australian real property (the principal asset test). For these purposes, Australian real property includes a lease of land. Accordingly, the finding that the tolling rights were inseparable from the lease means that the principal asset test would be satisfied and CGT may therefore apply to any non-resident non-portfolio investor in the trust.
Second, it raises questions about the application of Division 6C which operates to tax public trading trusts as if they are companies. As indicated above, the CCM group used a classic stapled trust/ company structure for the road. Under Division 6C, a public trading trust is a public unit trust that does not limit itself to “eligible investment business”, relevantly including investing in land for the purpose or principal purpose of deriving rent. If the trust had been successful in arguing that the tolling rights were a separate asset from the lease, would that have meant it was no longer carrying on an eligible investment business? It seems not, as the structure of the arrangements were that the company mainly paid rent to the trust, with the licence fee for the tolling rights being a nominal amount each year. Division 6C specifically provides that a trust will not be a trading trust if not more than 2% of its gross income is from activities other than eligible investment business (provided that the other activities are incidental and related to the eligible investment business).
Broader commercial implications
The case may have broader commercial implications. For example, if a tolling right is not separate from a lease of land then it cannot be separately assigned to a third party and it may not be possible to provide specific security to a financier over a tolling right.
The Cross City Tunnel case is therefore of significance to stamp duty going forward, tax and also from a commercial perspective and may present opportunities and pitfalls that need to be carefully considered in other infrastructure projects.