The Supreme Court of Victoria has confirmed that wind farm assets on leased land do not constitute land to be valued. This is significant in the context of Victorian Fire Services Levy, duty and income tax on sale for foreign investors.
A recent test case in the Supreme Court of Victoria in AWF Prop Co 2 Pty Ltd v Ararat Rural City Council  VSC 853 confirms that the value of above-ground assets in a wind farm project are not taxable as “land”, either under common law principles or the Victorian legislation dealing with tenants’ fixtures. This means most wind farm assets will not be subject to Victorian Fire Services Levies, and that foreign investors generally won’t pay any capital gains tax on exit. The case may also have implications for stamp duty, albeit the precise rules are different in the various States.
The decision may also have implications for wind farm assets held in trusts that are seeking Managed Investment Trust (MIT) status. Solar generation and battery storage industries are also likely to enjoy the same treatment if the assets are held in leasehold arrangements, in stark contrast to the taxation treatment of land-rich fossil fuel power generation businesses.
- Wind farm operators occupying land under leases from property owners should seek advice on how the Ararat Wind Farm decision may apply to their business. Other operators, such as solar farms, will also likely be affected.
- The decision will likely have wider prospective application, including for wind and solar farms, across a range of taxation matters. For example, the decision may have tax implications for the treatment of wind farm, and similar, equipment as fixtures or chattels both in Victoria and in other States.
- In the first instance, Fire Services Levies based on the value of the equipment put on the land by those operators will likely be too high. Valuations should be reviewed to consider whether objection is warranted.
The case concerned a dispute about how much Fire Services Levy should be paid by the Ararat Wind Farm business. The Victorian Fire Services Levy is payable by the land owner pursuant to the Fire Services Property Levy Act 2012 (Vic) and calculated based on the capital improved value of the leviable land.
The Ararat Wind Farm operated on land leased from farmers in the Ararat region of Victoria and owned assets including turbines, a substation, demountable management buildings and storage sheds, wind-monitoring masts and power lines (the above-ground assets). It also included access roads, fencing, a car park and underground cabling.
The Ararat Wind Farm’s principal ground of objection was that the returned capital improved value of $470.4m was too high and that, properly assessed, the capital improved value apportioned to the subject land within the Ararat Council municipality was between $10-$20m. The critical issues in the case were the identity of the relevant occupancy (or occupancies) to be valued, how the occupancies were to be valued, and whether the wind farm assets should be included in the valuation.
Identifying the occupancy, or occupancies, to be valued
Richards J confirmed that the first step in identifying the parcels to be valued was to establish “ownership”, in the sense of a freehold estate in possession, of the relevant land. Her Honour observed that the farmers, not Ararat Wind Farm, were the owners of the land and that the existence of a lease did not defeat the farmer’s estate in possession. The fact that the land was occupied by a wind farm did not change how the land was to be valued: rather the occupancies provide the area of the land to be valued.
Once title was established as the starting point for valuing land, her Honour’s next step was to identify the relevant parcels on each farmer’s title based on whether the farmer or Ararat Wind Farm was the occupant, in accordance with the Victorian general valuation rules (under the Valuation of Land Act 1960 (Vic) (VLA)) requiring separate occupancies be treated as separate parcels.
How the land was to be valued
Applying Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445, her Honour held the land should be valued by reference to a hypothetical sale of a fee simple interest in the land, on the basis that the fee simple interest is “unencumbered by any lease”. The term “unencumbered by any lease” in section 2(1) of the VLA does not mean it should be assumed that the property is “not leased”. Rather, it means that the fee simple estate is not encumbered in practical terms by a lease that diminishes the value of the estate. The rent paid under the actual leases is likely to be a guide to the market rental for occupation.
The two-step approach to valuation adopted by Her Honour is significant because the resulting valuation postulate involves valuing the land from the perspective of the owner receiving rent from an occupant, not on the hypothesis that the occupant was selling the land itself. Although the decision concerned the Fire Services Levy, this approach appears equally applicable to the calculation of land tax and may have implications for landholder duty (although it may be less significant in the case of land tax, which is levied on unimproved site values).
Chattels versus fixtures
The next task before her Honour was to work out whether the wind farm assets should be included in the valuation or not. Richards J concluded that none of the above-ground assets formed part of the land, with the result that none of those assets could be included in the valuation postulate (a hypothetical sale). This was because:
- The above-ground assets were chattels at common law, essentially because the assets were all designed to be unbolted from their concrete foundations for repair or resale and because the relevant permits, the terms of the lease and the effective lives of the assets meant this would almost certainly happen;
- in any event, the relevant State severance legislation (section 154A of the Property Law Act 1958 (Vic)) has the effect that the tenant rather than the landowner has ownership of any fixtures, renovations, alterations or additions installed at the tenant’s cost, unless the lease otherwise provides. That is, the tenant’s fixtures are deemed to be excluded from the land to be valued; and
- the above-ground assets were not otherwise ‘improvements’ for the purposes of the VLA.
This aspect of the decision is of particular significance because if the more valuable renewable energy assets are not part of the “land” to be valued under common law principles, then this may have implications for landholder duty upon acquisition of their interests.
Further, a capital gains tax exemption should be available for foreign investors upon exit, consistent with the approach taken by the ATO in recent private binding rulings in relation to wind farms. There may also be implications for wind farm assets held in trusts that are seeking MIT status. In that regard, one criteria to satisfy the trading trust test contained in the MIT regime is for the trust to be investing in land for the purpose, or primarily for the purpose, of deriving rent. If the wind farm assets are not “land”, but are held by the trust, this requirement may not be satisfied.
Although the distinction between fixtures and chattels is always a question of fact and judgment in every case, her Honour considered that the deciding factors were that the wind farm operator was obliged to remove the assets on expiry of the leases (and had rights to do so during the lease term) and that the assets were designed to be unbolted from concrete foundations and repaired or resold into the second-hand market.. Further, it appears that above-ground assets will not be included in land value provided they are on leased land and installed at the tenant’s expense, regardless of whether they are fixtures at general law (at least in Victoria, as severance legislation differs in other Australian jurisdictions).
Although the decision deals with Fire Services Levy, it serves as a reminder of the striking difference in the State and Federal tax treatment of renewable generation assets, compared to traditional land-rich fossil fuel power generation businesses. Curiously, these differing outcomes are not a result of any deliberate policy interventions to subsidise clean energy, but simply reflect the basic architecture of a tax system that taxes globally immobile capital like land more heavily.
It is unclear at the time of publication of this article whether the case will be appealed.
Ararat Wind Farm was represented by Herbert Smith Freehills and Greenwoods & Herbert Smith Freehills during the course of the matter. If your business may be impacted by the above decision, get in touch with the authors to find out more about what this means for you.
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