Taxable Australian property: Insights from YTL and Newmont cases

The Federal Court has recently handed down two decisions on whether foreign resident shareholders were exempt from capital gains tax (CGT) on disposals of shares in Australian companies where the companies held assets that were attached to or on Australian land.

The key question in these cases was whether the shares were taxable Australian property (TAP) because most of the companies’ assets were taxable Australian real property (TARP), in other words, whether assets attached to land counted as real property. The main takeaway is that just because something is fixed to land, it doesn’t always mean it’s real property for tax purposes, and the rights that allow those assets to be attached must be considered.

The Federal Court found in both cases that the shares were not TAP. In the YTL case, the Court decided that shares in a company owning an electricity transmission business on leased land were not real property because of a specific South Australian law. In the Newmont case, the Court looked at whether plant, equipment and other fixtures on land leased or held under mining tenements by a gold mining company counted as TARP, and also considered how to value TARP and non-TARP assets.

These decisions could change, as the Commissioner of Taxation has appealed the YTL case and may appeal Newmont. The Government may also update the law to make some assets, like those in these cases, specifically count as TARP.

YTL case: Electricity assets and real property

YTL Power Investments Limited (YTL) was a non-resident company. It held 33.5 per cent of the shares in an Australian resident company, ElectraNet Pty Ltd (ElectraNet), which operated South Australia's electricity transmission system. Its business operations arose from the privatisation of the electricity industry in South Australia. 

ElectraNet entered into a series of agreements in relation to the following assets:

• Powerlines, substations, wires and other equipment used for the transmission of electricity
• Licences and other contractual rights to access land belonging to third parties to access electricity assets situated on the property of the third parties
• Land or interests in land, on, over or under which some prescribed electricity assets are situated, or by which access is obtained to those assets.

It’s important to remember that the Disposal Act, passed by the South Australian Parliament, clearly states the electricity assets are personal property, not part of the land. This difference was central to the Court’s decision.

The taxpayer sold the shares in ElectraNet, realising a capital gain of approximately $948m. The ATO assessed the capital gain on the basis that the membership interest in ElectraNet was TAP under section 855-15 of the ITAA 1997. The parties agreed the shares in ElectraNet were ‘CGT assets’ and the disposal of the shares in ElectraNet resulted in a CGT Event A1. However, the parties disagreed about the shares being TAP.

Division 855: Key provisions for foreign investors

Section 855-10 allows foreign residents to disregard a capital gain or loss from a CGT event unless the asset is taxable Australian property (TAP), which includes an indirect interest in real property located in Australia and a variety of other interests including, leases over land, mining tenements and indirect Australian real property interests held through another entity. Shares in a company, like those in ElectraNet, can be indirect Australian property interests where, amongst other things, the company’s underlying value is principally derived from Australian real property. The issue was whether the electricity assets constituted ‘Australian real property’.

YTL and ATO Arguments

The taxpayer argued that under the South Australian Disposal Act, the electricity infrastructure was severed from land, which classified it as personal property, not real property. As such, ElectraNet’s assets were not real property due to the operation of the Disposal Act, and the shares were not an indirect Australian Real Property interest. 

The ATO’s position was that ElectraNet’s transmission infrastructure was affixed to land and constituted real property under its ordinary meaning. Accordingly, the shares were indirect interests in taxable Australian Real property.

The Court found for the taxpayer, finding ElectraNet's rights under the Transmission Network Lease did not constitute real property situated in Australia because:

• The character of the assets affixed to the land will only be real property if the rights that ElectraNet holds under the Network Lease have the character of real property
• ElectraNet's rights under the transmission network leases did not constitute real property situated in Australia because the Disposal Act deemed the lease to be a lease over personal property, and therefore the assets affixed to the land under that lease are also not real property
• The term real property bears its technical legal meaning. The Court rejected the ATO’s contention that the term real property has an ordinary meaning.

In so doing, the Court also rejected the ATO’s argument “that to the extent the Leased Assets were affixed to land, they should be regarded as part of the land, based on the principles relating to fixtures.”

Newmont case: Mining assets and leasehold rights

Newmont and its subsidiaries conducted gold mining in Australia in several locations and, under a corporate restructure, two of the non-resident shareholders disposed of their shares in Newmont. The issue was whether the capital gain on disposal of these shares was disregarded because Subdivision 855-A disregards capital gains made by non-residents unless the relevant asset is TAP. Shares in a company can be TAP where the company’s underlying value is principally derived from Australian real property. This is determined where the value of the company’s assets that it holds directly or indirectly are TARP, exceed the value of its assets that are not TARP (principal asset test).

The Newmont decision accords with YTL case in its consideration of the definition of real property and its conclusion that:

• The technical legal meaning of real property in relation to subdivision 855-A, was the appropriate test, not a broader ordinary meaning
• To determine if an asset is real property, an analysis of specific rights held and whether they amount to an interest in land, is required.

The Newmont case goes into more detail on various aspects, including in what situations plant and equipment attached or on land are fixtures attached to the land. A high-level summary of the Judges’ comments is as follows:

• At general law, fixtures attached to the land are treated as part of the land itself
• However, not all items affixed to the land are fixtures
• The degree of annexation and the object or reason for the annexation needs to be considered
• The fact that a type of item is a fixture in one case does not mean that it will be a fixture in another
• The judgement provides a detailed list of matters to consider in determine when a particular thing erected or brought onto the land will become part of the land itself
• A ‘tenant’s fixture’ is not part of the leasehold, but rather it is part of the freehold.

The last dot point was decisive in this case as the majority of the value of the fixtures to the land in this case were affixed under leasehold in relation to the Boddington mine.  Although the judge concluded that relevant items of plant and equipment at the Boddington mine are fixtures on the land, they are not TARP because they are attached under the mining lease, which is personal property and not ‘real property’. Although mining leases are included in the definition of TARP, that is not enough to make the fixtures ‘real property’ and therefore the fixtures are not TARP. This also applies where the holder of the mining lease is also the holder of the freehold interest, i.e. the landowner.

The Newmont case facts differed from the YTL case, in that it looked more closely at the different assets held by Newmont and the rights under which these assets were attached to the land. Some of these assets were attached to the land under mining tenements, and others via regular leases. Determining which assets were TARP and which ones were not TARP was relevant in determining whether the shares passed the principal asset test. The relevant assets were plant and equipment, mining information and mining tenements.

Where any of the above assets are not TARP it is important to know what their values are to determine whether more than 50 per cent of the value of the company’s assets are TARP.

The Court clarified various valuation approaches that should be used in valuing the relevant assets but deferred the final calculations to be conducted by a valuer to be appointed by a referee.

Proposed amendments to Division 855

The future implications of the YTL and Newmont cases may be further restricted if and when the Federal Government’s 2024/25 Budget announcements are introduced. These proposed amendments would expand the definition of TARP to include infrastructure and machinery installed on land situated in Australia, including wind turbines, solar panels, batteries, transmission towers/lines, transport infrastructure, and mining machinery. While the exact details of these amendments are not yet available, if the Government proceeds with these amendments, it is expected the Government would seek to ensure situations like the YTL transmission towers and Newmont gold mines would be included in the expanded definition of TARP. 

How BDO can help

Should you have any questions regarding how the outcome of these cases may impact your organisation, contact your BDO tax adviser for further guidance, or visit our tax services page to see how we can help.