Fixtures have been the subject of lively and robust discussions amongst lawyers for over a century now and not much has changed. Although the New South Wales Government has recently legislated to erode the doctrine of fixtures in the stamp duty world (we’ll get to that later), on 20 April 2021, the Supreme Court of New South Wales published its decision in SPIC Pacific Hydro Pty Ltd v Chief Commissioner of State Revenue, which is likely to be the last case dealing with fixtures in New South Wales as we currently know it.
On 12 May 2016, SPIC Pacific Hydro Pty Ltd (SPIC) acquired 100% of the units and shares in Taralga Holding Land Trust (Holdco Land Trust), Taralga Holding Nominees 1 Pty Ltd, Taralga Holding Operating Trust and Taralga Holding Nominees 2 Pty Ltd. Through a series of sub-trusts and subsidiaries, Holdco Land Trust indirectly held interests in freehold interests in land as well as leasehold interests in land upon which a wind farm had been in operation since 16 July 2015.
While the total market value of the freehold interests in land was only $750,000, the value attributed to the plant and equipment of the wind farm was determined to be $227,182,500, which was based on the value of the fixtures in the fixed asset register. The Chief Commissioner assessed SPIC to landholder duty of $12,394,573.37 on the basis that the plant and equipment constituted “fixtures” and gave rise to an interest in land for Holdco Land Trust. In this respect, Holdco Land Trust exceeded the requisite landholder duty threshold value of $2 million and was deemed to be a landholder for duty purposes.
Friend or fixture?
The Supreme Court agreed with the Chief Commissioner and found that the plant and equipment were fixtures for landholder duty purposes. In reaching his conclusion, Justice Payne revisited the doctrine of fixtures, and looked at the degree of annexation to the land, and the purpose or object of that annexation.
Non-exhaustive factors in assessing the degree of annexation included:
- 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 or property; and
- Whether the cost of removal would exceed the value of the attached property.
While non-exhaustive factors in assessing the purpose or object of annexation include:
- Whether the purpose or object of that annexation was to better enjoy the items annexed or to better enjoy the land;
- The nature of the property the subject of the affixation;
- Whether the item was to be in position for a substantial period or temporarily; and
- The function to be served by the annexation of the item eg. whether they were secured to keep the equipment steady when in operation.
Weighing up all of the above, the Supreme Court found that the wind turbines were very strongly affixed to the land by concrete foundations, steel reinforcements and two rows of bolts cast into the concrete. In addition to this, there was 28 kilometres of underground cabling which connected back to a switch room. The switch room building, control building and met masts used to operate the wind turbines were also very strongly affixed to the land. The removal of all these concrete foundations and cabling would cause significant and possibly permanent damage to the land.
In relation to the purpose of annexation, it was determined that every item was fixed on the land for better enjoyment by the tenant of the land as an integrated wind farm that operated on the land. In coming to this conclusion, the Court noted that the wind farm was built after an 18 year study of the land establishing its suitability as the location of a wind farm, and that all the plant and equipment would only be removed when the plant and equipment had exhausted its useful life or the wind farm had been decommissioned. None of the items had a function or use independent of the wind farm operation conducted on the land, therefore the purpose or object of the annexation was the use of the land as a wind farm. On this basis, it was clear that the plant and equipment were fixtures.
How do you put a price on land that isn’t land?
As the value of the freehold interests would not have exceeded the landholder duty threshold, the valuation of the fixtures became an important part of the case. Despite the Chief Commissioner’s arguments that the tenant’s right to sever and remove fixtures installed by it on the premises gave rise to a separate equitable interest in land, the Supreme Court established that the tenant’s interest in the plant and equipment (as unsevered leasehold improvements) was purely a proprietary interest in the land arising from and governed by the terms of the applicable leases.
As a starting point, it was determined that the statutory context and purpose for the valuation needed to be identified. Therefore, to discern the value of an interest in a landholding entity that operated a wind farm, the valuation needed to be conducted in the context of a hypothetical sale of a going concern where the hypothetical purchaser will also have access to and receive the benefit of other assets of the landholder which affect land value. This approach endorsed the principle established in the High Court case of Placer Dome and was preferred over an approach ascertaining the value of the plant and equipment as standalone assets of the business due to the fact that the assets of the going concern are part of the land and not separate to the land. It was also noted by Justice Gagler in Placer Dome, that where a valuation applied by a taxpayer leaves a large gap between the valuation and the purchase price paid, the gap necessarily raises a question about the reliability of the valuation.
Ultimately, the Court accepted SPIC’s expert valuer’s calculation method and agreed with the Chief Commissioner’s expert valuer’s constructive criticism of the discount used by SPIC’s expert valuer. In applying the above principles, the Court found that the interests in land should be valued at $201,621,227, being the estimated annual market rental for the fixtures (adjusted down on the basis that a hypothetical lessee wouldn’t be paying rent for the fixtures), multiplied by the unexpired term of the lease, and applying a discount rate to take into consideration the expect cost of repairs and maintenance of the fixtures and the deferred liability to remediate the site.
It should be noted that this case is based on facts which transpired before section 147A of the Duties Act 1997 (NSW) was introduced on 24 June 2020. Section 147A expands upon the meaning of “land” for the landholder duty provisions, and clarifies that land includes anything fixed to the land regardless of whether the thing is a fixture at law. Based on this amendment, it is unlikely that this case will cause adverse stamp duty implications for wind farms and other renewable energy projects and it is unlikely that the same duty issues regarding fixtures will be considered again.
However, for the purposes of valuing interests in landholders, there are some key takeaways. Where the interest in land is not readily ascertainable, it is important to identify the relevant interest in land. Following this, it is equally important to consider the statutory context and purpose for the valuation and to ensure that the relevant context is consistently applied to each step of the chosen valuation method.
Although the stamp duty impact of this decision is not significant, this case could have implications on the levying of council rates and other similar levies. These tend to be based on the improved value of land and these improvements to land would include fixtures. Therefore, on wind farm and solar farm projects, where the equipment is not necessarily a fixture at law, the impact of this decision could result in increased rates and levies for the landowners.