Appellant v Respondent

FIXTURES - Whether electricity generator units and ancillary plant chattels or fixtures - Applicable principles - Plant held to be fixtures

1 The respondent ("SRO") assessed the appellant ("the taxpayer") for duty of $7,309,296 under the "land rich" provisions in Part 2 of Chapter 3 of the Duties Act 2000 (Vic) ("the Act") on the basis that the taxpayer's acquisition of all the issued shares of Latrobe Valley BV ("LVBV") on 17 October 2005 was a "relevant acquisition"[1] of an interest in a "landholder" that was "land rich".[2] The taxpayer has appealed the imposition of the duty.[3]

2 The taxpayer did not dispute that LVBV was a "landholder"[4] at the relevant time for duty purposes, although LVBV did not own land in its own right. The taxpayer accepted that s 74 of the Act applied to provide that LVBV held an entitlement to land and other property through a "linked entity", Valley Power Pty Ltd ("VP"), a wholly owned subsidiary of LVBV. As a consequence, VP's property, which included land on which a power plant was operated, constituted property held by LVBV for duty purposes.

3 The taxpayer has challenged the proposition that LVBV was "land rich" for duty purposes. Whether LVBV was "land rich" depends on whether the value of LVBV's land holding comprised 60% or more of the unencumbered value of all its property, which is the test prescribed in s 71(2)(b) of the Act.[5] Only the value of the land and other property that LVBV was entitled to through VP, as prescribed by s 74, is relevant for this purpose because LVBV's sole asset as at 17 October 2005 was its shares in VP, which is not to be counted in determining whether LVBV was "land rich".[6]

4 The taxpayer has also challenged its liability to pay penalty tax of $1,461,859.20 at the rate of 20% of the tax unpaid on the basis that if it is liable for the duty, the SRO erred in law in not reducing the penalty tax to nil or 5% of the tax unpaid.

5 The taxpayer bears the onus of proving its case.[7]

6 The taxpayer was the successful bidder for the equity interests in a gas turbine power plant ("the Peaker Facility") located adjacent to the Loy Yang B power station in the La Trobe Valley ("the site"). The Peaker Facility is a power plant that generates and supplies electricity to a centralised electricity pool at very short notice to meet rapid increases in demand and high demand in peak periods, thus assisting to maintain the reliability of electricity supply. The power plant has a 300MW net physical capacity which is generated by six "twin-pac" gas turbine electricity generation units ("units") each with a 50MW capacity, which provide the nominal output of 300MW.

7 The equity interests that the taxpayer acquired were all the issued shares in LVBV, a wholly owned subsidiary of IPM International BV ("IPM") and all the issued shares in Contact Peaker NZ Pty Ltd ("CPNZ"), a wholly owned subsidiary of Contact Energy Limited ("CEL"). LVBV's wholly owned subsidiary, VP, and CPNZ's wholly owned subsidiary, Contact Peaker Australia Pty Ltd ("CP"), operated and maintained the power plant as joint venturers under the terms of a joint venture agreement in which they held interests in the proportion of 60% and 40% respectively.

8 VP, which owned the site and units, "made available and dedicated" "its freehold interest" in the site and Peaker Facility exclusively for the purposes and duration of the joint venture. CP, which had a leasehold interest in two of the units that VP leased to it, "made available and dedicated" its leasehold interest exclusively for the purposes and duration of the joint venture.[8]

9 In 2005 IPM and CEL offered their respective interests in the power plant for sale in a joint sale process. The taxpayer paid $243m for the shares in LVBV and CPNZ in an arm's length dealing. Out of that purchase price, $177.98m was allocated and paid to LVBV and the balance was allocated and paid to CPNZ. The joint venture was terminated shortly after the sale.

10 The power plant and site had a combined unencumbered value of $152,367,920 at the time of acquisition comprised as follows:

11 The taxpayer accepted that items 2-4 were fixtures, the value of which was to be taken into account in valuing the "land holding" and the SRO accepted that items 8 and 9 were chattels, and did not form part of the value of the land holding. In dispute was whether items 5, 6(a), 6(b) and 7 were fixtures or chattels and thus whether the value of any of those items should be taken into account in determining the value of LVBV's attributed land holding for the purposes of s 71(2) of the Act. The taxpayer contended that those items were chattels. The SRO contended that those items were fixtures but accepted that LVBV was not land rich, if the units and ancillary plant were chattels.

(a) CP had a proprietary interest in the six units; and

(b) if so, how CP's interest impacted on the value of LVBV's s 74 land holding for the purposes of s 71(2) of the Act. The SRO accepted that LVBV was not land rich, if the unencumbered value of LVBV's attributed land holding was less than the full value of the site and fixtures (agreed to be $140,022,420 if items 5, 6(a), 6(b) and 7 were fixtures).

13 I have concluded that items 5, 6(a), 6(b) and 7 were fixtures but that the unencumbered value of LVBV's land holding as at 17 October 2005, for the purposes of s 71(2) of the Act, was less than the full value of the site and fixtures and that accordingly the taxpayer was not land rich and the assessment should be set aside.

B. Whether the generator units and ancillary plant were fixtures or chattels

14 The units are called "twin-pacs" because a single electrical generator is driven from each end by a power turbine and gas engine. The function of the gas turbine is to force compressed air through a metal tube and into the power turbine causing the blades of the power turbine to rotate. The function of the power turbine is to turn the rotor for the generator. The blades of the power turbine are connected to a shaft that rotates the generator rotor. The function of the generator is to generate electricity. As copper wiring on the rotor passes magnets lining the interior of the stator in the generator, electricity is generated and passes through wires on the rotor. The electricity generated by a unit flows to a unit transformer which changes the voltage and amplitude of the electricity produced by the unit. The electricity from each transformer flows to a switchyard situated onsite and into the "common bus", being a common electricity transmission wire which connects to an overhead 220V transmission line. That line extends offsite and delivers the electricity into the national electricity grid.

15 The units are located in two sections occupying approximately one third of the power plant site. The other two thirds are taken up by a switchyard and infrastructure.

16 The components of the units are housed in separate enclosures ("modules"). The modules of each unit rest on a reinforced concrete foundation that is slightly bigger than the unit and sits on engineered fill. The foundation is held in place by its own weight and the weight of the unit sitting on top of it. The foundation provides a solid base for the unit which is needed for its proper operation. The modules are mounted on a steel frame that is bolted into the foundation through metal plates and gaps between the modules and the foundation are cement grouted. The anchoring is necessary to hold the machinery in place to prevent misalignment caused by vibration. The use of bolts makes it a relatively simple logistic process to place or remove the modules, which are lifted or lowered into position by crane. The assembly and disassembly of a unit is possible without damage to the other units or to the site. The modules are interconnected by cabling and piping to varying extents and various cables run between the units and other infrastructure. The pipes and cables can be disconnected without damage to the other units or to the land and are able to be accessed and removed without damage to other infrastructure or the land.

17 The housing and interconnection of the units is designed so that the units can be disassembled, transported (whether by ship, air or road), reassembled and installed with relative ease.

18 The units function independently of each other. Any one of the six units can generate electricity into the national grid at any time. The removal of a unit or a component of a unit would not impair the electricity generation capacity of the other units at the site.

19 These features are typical of gas turbine generation units. They are reusable and, when the economics makes it worthwhile, can be relocated or individually sold. There is a substantial second hand market for these kinds of units, which is how VP acquired the units in the first place. These units came from two sites in New Zealand where they were disassembled, shipped to Australia, refurbished, transported by truck to the Peaker Facility site, installed at the site and commissioned.

20 It was submitted for the taxpayer that these features were strong factors in favour of the conclusion that the units retained their character as chattels, although they were bolted to the land. It was submitted that they were bolted to the land for their better use and enjoyment as chattels and not for the improvement of the land. This submission was supported by expert evidence to the effect that the units needed to be bolted to the land to keep the units in a stable position to stop excessive vibration which would impair the effective and safe use of the units.

21 The SRO accepted that the units must be bolted to the land for their safe and efficient operation. However, the SRO contended that the units are the most valuable components of the power plant and should be characterised as fixtures having regard to:

(b) their functional integration into the Power Plant as a whole;

(c) that the Units were intended for permanent fixing as part of the Power Plant; and

(d) that the sole use of the land was as a Power Plant.

22 The safety and operational reasons for which the units were bolted to the land and their ability to be removed, if necessary or appropriate, with relative ease without any damage to the land or the other units are important considerations but are not decisive of the characterisation of the units. The question of whether a chattel has become a fixture depends upon whether the item was fixed to the land with the intention that it would remain there or with the intention that it would be there only temporarily.[9] The relevant intention is to be inferred objectively and does not depend on whether the owner actually or subjectively intended that the item should or should not remain fixed to the land, although this may be a consideration.[10] The Courts have often expressed the question as depending on the degree and purpose for which the item was fixed. That expression is simply a shorthand way of encapsulating the matters that will bear upon the consideration.[11] There is no one test that is conclusive of characterisation.[12] The issue is whether the circumstances, viewed objectively, evidence an intention on the part of the owner that the item should remain permanently on the land. The circumstances that may bear upon the question will depend on the particular case. Usually, indicia of such an intention will include the manner in which the item is fixed to the land, the function to be served by fixing the item to the land, the period of time for which the item has been fixed, whether the item plays a part in an integrated system on the land and the degree of interconnection with other plant or structures on the land. But they are not decisive and their probative value will depend on the factual context.

23 Senior Counsel for the SRO referred to two authorities in which power generating equipment has been characterised as a fixture. In Origin Energy Power Limited v Commissioner of State Revenue[13] Barker J (as president of the State Administrative Tribunal of Western Australia) held that a co-generation power plant producing electricity and steam and held by a joint venture under a site licence giving the joint venture exclusive possession of the land on which the plant was located for the whole of its economic life of 15 years was a fixture.[14] It was held to be a fixture notwithstanding the Tribunal's finding that "there has always been a large demand for used gas turbine power generating equipment and such plant is capable of being decommissioned, packed, shipped and re-erected elsewhere worldwide at a discount to the cost of installing new plant and equipment".[15] In finding that the co-generation plant was a fixture, Barker J said:

However, on the face of the evidence before the tribunal, having regard to its bulk, the manner in which the plant is connected to the civil works and held in position otherwise than by its own weight, and by reason of how the plant interconnects with other elements of the co-generation plant and with other fixed plant and equipment on Crown Lease 3116/7574, I find the plant and equipment constitutes a fixture.[16]

24 Similarly, in Dalkia Utilities Services PLC v Celtech International Limited[17] a power plant installed to provide electricity to a paper mill was found to be a fixture, notwithstanding that it was removable.

25 The outcome in those cases is to be contrasted with the outcome in Eon Metals NL v Commissioner of State Taxation (WA).[18] In Eon Metals NL the Court considered whether a power station was a fixture. The power station incorporated five diesel generating sets, ancillary equipment and control gear enclosed in a metal clad shed. The Court held that the items making up the power station should be regarded as chattels:

Taking into account the limited life of the mine, the transportable character of the equipment concerned, the common practice to transfer equipment of that kind, the economic incentive to remove it, the relatively slight degree of attachment to the ground, and the facility with which detachment could occur ...[19]

26 These cases illustrate the importance of the particular factual context to the question of the status of a power generating plant as a fixture or as a chattel and highlight that in determining whether an item has become a fixture or remains a chattel, each case must be decided according to its own particular circumstances. Each case must be considered on its own facts.

27 In my view the facts show that the objective intention of installing the units at the Peaker Facility site was for the long term use of that site as a gas turbine electricity generation plant and that the units should be characterised as fixtures. There are a number of matters that compel that conclusion:

(a) the Peaker Facility was purpose built by VP as a gas turbine electricity generation facility on the Peaker Facility site;

(b) the Peaker Facility site was freehold that VP purchased for the purpose of establishing the facility;

(c) the facility was designed and constructed to accommodate the six units that VP acquired for commissioning as the power generating plant at that site;

(d) the Peaker Facility was intended to have a long life at that site. VP, before the facility was fully constructed, entered into a joint venture with CP to operate and maintain the facility at that site for an indefinite term, for the purposes of which VP "made available and dedicated" the site and all the plant and equipment needed for the functioning of the facility. VP also entered into a 25 year lease with CP under which it leased to CP two of the units to be used at the site for the purpose of the joint venture. It may be inferred that the parties intended the joint venture to last at least 25 years, being the term of the lease;

(e) additionally, VP committed to a network of contractual arrangements of indefinite or long term duration for the operation and functioning of the power plant;

(f) once the power plant was operational, VP's principal business activity was the operation of the facility conducted as a joint venture with CP;

(g) the units were not ancillary pieces of equipment at the facility. They were part of the means by which the electricity was generated;

(h) the units were expected to have a long operating life;

(i) there was no evidence that VP considered using the units for some other purpose - for example, relocation to another site or for sale in the second hand market. There was no evidence of other projects that VP had in mind regarding the units, either during the term of the joint venture or after cessation of the joint venture;

(j) there was no evidence that the units or components of the units were removed at any time other than for the purpose of maintenance. If removed, they were re-installed at the site. They were not deployed for use elsewhere by VP;

(k) the power plant functioned as a going concern up to the time that the underlying equity interests were purchased by the taxpayer.

28 It is clear the units and components of the units were removable, mobile and transportable and that it was necessary to bolt them to the land only to ensure their efficient and safe use. Clearly also, there may be some economic incentive to move them. However, in this case, those qualities do not prevent them from having the character of fixtures. I am satisfied that that the units were not intended to be located at the Peaker Facility site for a temporary purpose but, rather, for the use of the land as a power plant.[20] The same considerations apply to the ancillary plant.

29 In forming this view I have taken into account the evidence on behalf of the taxpayer of its possible intention to move the units elsewhere. However, when it purchased the equity interests the units had the character of fixtures. It may be that the taxpayer's future use of the units may transform their character into chattels at some time, but at the time of acquisition of the equity interests, which is the relevant time at which their character is to be decided, the units did not have that character.

30 The units therefore were part of the land and the value of the units is to be taken into account for the purpose of determining the value of LVBV's attributed land holding at the time that the taxpayer acquired the shares in LVBV.

C. Whether the cabling and pipes were fixtures or chattels

31 These items were also readily removable but the same considerations apply in determining their character as fixtures or chattels. They formed part of an integrated system which was intended for long term operation as a power plant on the Peaker Facility site. Accordingly these items should also be characterised as fixtures and their value similarly taken into account in valuing the land.

(i) Issue 1: whether the joint venture agreement gave CP a proprietary interest in the units

32 If the Joint Venture Agreement gave CP a proprietary interest in the units, the value of VP's interest in the freehold (on the premise that the units are fixtures) would be affected for duty purposes because CP's interest would need to be taken into account in valuing VP's interest. [21] [The site itself had a nominal value - most of the value was in the units.]

33 For the SRO it was submitted that CP's rights under the Joint Venture Agreement were contractual in nature as the agreement, properly construed, only regulated the operation of the power plant business and the sharing of revenues generated by that business. It was contended that the joint venture agreement only granted CP personal rights of use and occupation of the units, the nature of which did not constitute a proprietary interest. This construction was said to be consistent with the declaration in Recital A of the agreement that "VP is the owner of the Peaker Facility"[22] and the agreed fact that it was a condition of VP securing funding for the construction of the power plant that it own 100% of the power plant.

35 Whether CP acquired a proprietary interest in the units depends on the proper construction of the Joint Venture Agreement.[23]

36 It is evident from the terms of the Joint Venture Agreement that VP and CP intended that they would commonly own the assets committed to the venture in the proportion of each party's defined share. This is apparent from clause 3.1 of the agreement by which the parties bound themselves to hold the joint venture assets as tenants in common, unless the agreement otherwise provided[24] and from clause 4.10 by which they bound themselves not to partition any of the joint venture assets.[25] These terms had the effect of giving CP a 40% proprietary interest[26] in the joint venture assets for the purpose of conducting the business at the Peaker Facility.

37 The issue then raised is whether the units were "Joint Venture Assets" as defined in the Joint Venture Agreement. If so, the effect of clauses 3.1 and 4.10 was to confer a proprietary interest in CP in the units as a tenant in common with VP as there was no provision in the Joint Venture Agreement for VP's ownership of the units to remain the property of VP to the exclusion of CP.

38 The assets of the joint venture included the right to occupy and use the site and the Peaker Facility to operate the facility and conduct the joint venture business. This is the proper construction of paragraph (a) of clause 1.1 of the definition of "Joint Venture Assets":

(a) the use and occupation rights in relation to the Peaker Facility granted pursuant to clause 3.2(a) and (b) -

when read in conjunction with clauses 3.2(a) and (b) which provided as follows:

3.2 Dedication of Joint Venture Assets

(a) With effect from the Commercial Operation Date, CP makes available and dedicates to the Joint venture all its leasehold interest in the Peaker Facility exclusively for the Purposes and the duration of the Joint venture.

(b) With effect from the Commercial Operation Date, VP makes available and dedicates to the Joint venture all its freehold interest in the Peaker Facility and Site exclusively for the Purposes and the duration of the Joint venture -

and the definition of "Purposes" in clause 1.1 as follows:

"Purposes" means the objective of the Joint Venture being:

(a) to make the capacity of the Peaker Facility available and to operate and maintain it to generate electricity as and when required by the Participants;

(b) to enable the delivery of electricity generated by the Peaker Facility to the respective Participant or their agent;

(c) to enter into the transactions contemplated by the Project Documents and the Financing Documents; and

(d) to do all such things as shall be ancillary to the foregoing.

39 The assets also included the site and power plant. Paragraph (g) of clause 1.1 of the definition of "Joint Venture Assets" included:

(g) all other property acquired, leased or held for the purpose or in connection with or in respect of the Joint Venture by or on behalf of the Participants, including, without limitation, any interests in real or personal property, chose in action, fixtures, buildings, plant and equipment machinery and stores.

40 The purpose of clause 3.2, properly understood, which included subclause (c) in the following terms:

(c) With effect from the Conditions Precedent Satisfaction Date each Participant hereby makes available and dedicates to the Joint Venture exclusively for the Purposes and duration of the Joint Venture all its interests in the Joint Venture Assets described in paragraphs (b) to (h) inclusive of the definition of Joint Venture Assets other than the Construction Contracts.

was to bind each of the parties to commit to contributing to the joint venture, the assets that would be owned by them in common. In relation to VP that included the site and the units as well as other plant and equipment that it owned and in relation to CP that included its leasehold interest in the two units it leased from VP.

41 In my view therefore, the joint venture agreement gave CP an equitable proprietary interest in the six units for the period of the joint venture. This finding is not inconsistent or incompatible with VP "owning" the units, as represented in Recital A of the joint venture agreement, as VP continued to hold the legal title.[27] Accordingly, CP's equitable interest is to be taken into account in valuing LVBV's attributed land holding for duty purposes.

(ii) Issue 2: whether the application of s 74 of the Act requires the joint venture agreement to be treated as if it had been terminated

42 Although it was not in dispute that as at 17 October 2005 LVBV was entitled to property through VP as a "linked entity", in issue was how s 74 applied if the joint venture arrangement gave CP a 40% equitable interest in the joint venture assets which reverted to VP on termination of the joint venture.

43 Section 74 is in the following terms:

1. Constructive ownership of land holdings and other property: linked entities

(1) For the purposes of this Part, a landholder holds land or other property if the landholder is entitled to it through a linked entity.

(2) Land or other property held because of subsection (1) is in addition to any land or other property that the landholder holds in its own right.

(3) The interest the landholder holds in land or other property referred to in subsection (1) is the proportion of the land or other property that the landholder would be entitled to receive if all linked entities were to be wound up as provided in subsection (4).

(4) A landholder is entitled to land or other property through linked entities, whether linked to the landholder or to other entities linked to the landholder or to each other, if, on the winding up of all linked entities and without having regard to any liabilities of the linked entities, the landholder would receive an interest in the land or other property held by any of the linked entities.

(5) However, land or other property of linked entities is not counted for the purposes of this Part unless at least 20% of it is received by the landholder ultimately from linked entities as provided by subsection (4).

(6) The value, for duty purposes, of the interest in land or other property that a landholder holds through a linked entity because of subsection (1) is that portion of the unencumbered value of the land or other property to which the landholder would be entitled (without regard to any liabilities of the linked entities) if each linked entity were to be wound up.

(7) In this section -

linked entity means any person or body, corporate or unincorporated, that may hold property in its own right or for the benefit of any person, and includes a trust but does not include -

(a) a natural person; or

(b) a public unit trust scheme or a company whose shares are listed on the Australian Stock Exchange or an exchange of the World Federation of Exchanges;

winding up of a linked entity includes any means by which the entity's property is divested in favour of the persons entitled to it and, in the case of a linked entity that is a trust, includes the vesting of the trust property in the beneficiaries.

44 The taxpayer contended that the joint venture was not a "linked entity" under s 74. I agree. Although the joint venture was an unincorporated body, it was not a body that "may hold property in its own right or for the benefit of any person". The joint venture assets were held by the joint venturers themselves in the proportion of their respective interests under the terms of the joint venture.

45 The SRO contended nevertheless that LVBV "held" the full freehold interest in the land for the purposes of s 71(2) on the basis that the full freehold interest would revert to VP, if the joint venture terminated. It was submitted that s 74 required the joint venture to be treated as if it was terminated for the purpose of determining the property to which LVBV was entitled through VP and, if treated as terminated, the full freehold interest was property to which LVBV was entitled through VP because the full interest reverted to VP. It was further contended that the full value of the freehold interest should be taken into account for the purposes of s 71(2).

46 In my view, s 74 does not apply in the way contended for by the SRO.

47 Whether the joint venture arrangement should be treated as terminated for the purposes of determining the interest in the freehold land and other property that LVBV "would receive" on the "winding up" of the joint venture depends on the meaning of the expression "winding up" as used in s 74(4). "Winding up" for this purpose is a statutory fiction. The section is not about the consequences of actual winding up. It is a "look through" provision to identify and bring within the scope of s 71(2) in relation to a landholder, property that is held by another entity. The function of s 74 is simply to prescribe the relevant link for the purposes of attribution of another's property to the landholder. The section requires an hypothesis about whether the landholder would be entitled to receive property of that other entity, if that entity was wound up. The stipulation is about entitlement to property, not about the consequences of winding up. Nothing turns on how the entitlement would arise as "winding up" includes "any means by which the entity's property is divested in favour of the person's entitled to it".[28] The relevant link between the landholder and the linked entity, for the purposes of s 74, is the landholder's entitlement to property of the linked entity.

48 Thus s 74 does not mandate that the joint venture arrangement should be treated as if it was terminated for the purposes of determining whether LVBV would receive an interest in the property held by VP, if VP was wound up as at 17 October 2005. The hypothesis is directed to establishing whether LVBV would have had an entitlement to the property then owned by VP in common with CP and any other property of VP, if VP (or for that matter CP) was wound up.

49 If VP was wound up LVBV, as the sole shareholder of VP at the relevant time, would have been entitled to receive VP's property (ignoring liabilities of VP).[29] VP's only land holding at the time was the freehold at the Peaker Facility that it owned. It owned that land as tenant in common with CP with a reversionary interest on termination of the joint venture. To put it another way, at the relevant time, CP's equitable interest was "carved out" of the legal estate.[30]

50 Therefore, CP's equitable interest must be recognised and taken into account in determining the value of the property that LVBV was entitled to through VP as at 17 October 2005 as prescribed by s 74.

(iii) Issue 3: the value of the land holding recognising CP's equitable interest

51 It was submitted for the SRO that it did not follow that the value of CP's equitable interest should be 40% of the value of the land at the time that the taxpayer acquired the shares in LVBV, given that its interest was "exclusively for the Purposes and duration of the Joint Venture"[31], reverting in any case to VP on termination of the Joint Venture.[32] It was submitted that the value must be something less than 40% of the land value. It was submitted that as there was no separate valuation of CP's equitable interest before the Court, the taxpayer had failed, in the circumstances, to prove how the value of CP's equitable interest impacted on the value of VP's interest in the land so that, although VP's interest might be valued at less than $140,044,420 (being the agreed total unencumbered value of the site and units, on the basis that the units were fixtures), the taxpayer had not established how much less.

52 This submission does not accord with the evidence. Although there was no separate valuation of CP's equitable interest in the land, there was valuation evidence of the value of VP's interest in the land on the assumption that VP held its interest in the land subject to the terms of the joint venture, under which it was obliged to dedicate its interest in the land to the joint venture for the duration of the joint venture but on termination would revert to VP. Mr Lonergan, an expert valuer for the taxpayer, valued VP's interest in the land at between $85.56m and $88.29m,[33] taking into account the reversionary interest to which he ascribed a value of between $3.83m and $10.65m.[34] Mr Lonergan was not cross examined on his valuation of the reversionary interest and his evidence should be accepted. In the circumstances, I am satisfied that the unencumbered value of VP's interest in the land, recognising CP's equitable interest, was between $85.56m and $88.29m ($86.93m being the midpoint).

53 The SRO accepted that LVBV was not land rich unless LVBV was attributed the full freehold interest in the land, not merely a 60% interest.[35]

54 The denominator becomes relevant if I am wrong in my conclusion that the application of s 74 involved the notional winding up of the joint venture, with the consequence that LVBV is to be attributed the full freehold interest in the land for the purposes of the calculation under s 71(2) of the Act.

55 The SRO contended that the denominator would comprise, in addition to the value of the full freehold interest of $140m (on that premise):

(b) 60% of the value of the remaining tangibles of the joint venture (ie items 8 and 9 in the table at paragraph 10 which the SRO accepted were chattels, not fixtures) in an amount of $12m; and

(c) 60% of the value of the remaining intangibles, being the balance remaining of $243m, which the SRO accepted was an arm's length price paid by the taxpayer for the shares in LVBV and CPNZ.

56 The taxpayer disputed that the interest would be 60% and not 100% and also contended that the denominator would include a lease receivable in an amount of $32m, in consequence of the lease also being required to be treated as if it was notionally terminated.

57 There are two issues about the cap contracts, namely:

(b) whether only 60% of the value should be brought to account.

58 Mr Lonergan valued the cap contracts at $82m. The SRO challenged the valuation, pointing to a valuation by Standard and Poor's in 2003 which valued the contracts at $17.5m and the taxpayer's own financial accounts for the year ending 1 July 2006 in which the contracts were recorded at the value of $32.5m. Mr Lonergan thought that both valuations were "unreasonably low", given that the cap contracts contributed 64% of the total revenue of the power plant. Mr Lonergan opined that the cap contracts had to have a value in the order of magnitude between $75m and $100m and, in his view, that value was $82m. His detailed calculations supporting the valuation of $82m went into evidence.

59 The SRO did not put a separate valuation into evidence - the SRO's expert frankly admitted that she had no expertise in valuing cap contracts.

60 I accept Mr Lonergan's valuation. Specifically, the SRO was unable to demonstrate that the methodology that he employed in valuing the cap contracts was wrong nor was the SRO able to demonstrate that there was error in his calculations.

61 Next the SRO submitted that only 60% of the value of the cap contracts at the relevant time should be reflected in the denominator on the basis that VP had to account to CP for 40% of the revenue from the contracts under the terms of an agreement between VP and CP titled the "Trading Agreement".

62 It is readily apparent from the terms of the Trading Agreement, notably clauses 4.1, 5.3 and the definitions in clause 1.1 of "Contracts", "CS's Share", "Relevant Percentage" and "Services", that VP had the contractual obligation to account to CP for 40% of the cap contract revenue during the period of the joint venture.

63 The value of the cap contracts plainly should be included in the denominator. But if the application of s 74 involved the notional winding up of the joint venture, as the SRO contended, the obligation of VP to account to CP for 40% of the cap contract revenue should also be treated as terminated in accordance with clause 2.1 of the Trading Agreement.[36] Accordingly, it would follow that the full value of the cap contracts would be included in the denominator, not merely 60% of $82m.

65 Items 8 and 9 (the spare twin pac and other mobile plant) were part of the plant making up the Peaker Facility, which was to revert to VP on termination of the joint venture as provided for in clause 15.2(b) of the joint venture agreement. Accordingly if the joint venture agreement was notionally wound up, VP would notionally own the whole interest in the Peaker Facility, including items 8 and 9.

67 The remaining intangibles would appear to be goodwill of the Peaker facility, in which case VP would notionally hold the full interest, not a 60% interest, on the assumption that the joint venture was terminated in accordance with clause 15.2.

68 Under the terms of the lease, CP had a continuing obligation under clause 4.2 to pay VP further rent equal to 40% of the debt payment due by VP under the facility under which VP obtained the funds to construct the power plant. It was an agreed fact that as at 17 October 2005, the amount then due was $80,446,747.65 and the liability as at that date with respect to the further rent payable was $32,178,698.

69 The taxpayer argued that the receivable was property of VP, being a contractual right to receive a sum of money.

70 The SRO did not cavil with the proposition that the lease receivable would be an item of property. Rather it was contended:

(a) that by the terms of the lease there would be no survival of the obligation on CP to make payment if the lease was terminated and thus, it was not an item of property to be taken into account;

(b) that it was not a separate item of property to be considered if all six units were included in calculating the value of VP's land holding, as the lease receivable would be included in the value of those six units. Reliance was placed on Balgra Office Enterprises Pty Ltd v Commissioner of State Taxation[37] where Gray J held that the right to receive rent is an incidence of ownership of the estate in fee simple and incorporated into the value of the fee simple;

(c) that it would have a nil value on termination of the lease, in any event; and

(d) finally that it should be disregarded under s 71(3)(b) or s 71(3)(c) of the Act.

71 I reject the SRO's contention that there would be no survival of the obligation on CP to make payment of the lease receivable, if the lease was terminated. The obligation was a continuing obligation under the terms of clause 4.2 of the Lease and the chose in action created by clause 4.2 would have crystallised into a debt due and payable by CP to VP on termination of the lease.

72 I also reject the SRO's contention that it was not a separate item of property to be considered if all six units were included in calculating the value of VP's land holding. In this regard it is unnecessary for me to consider the correctness of the decision in Balgra Office Enterprises, which was challenged by senior counsel for the taxpayer,[38] as the case is distinguishable from the matters that I must decide in the present case. It is one thing to value a piece of property taking into account its commercial use and the revenue stream. That was the issue in Balgra Office Enterprises. But here the question is the value of the lease receivable, as a separate identifiable piece of property. The finding in Balgra Office Enterprises does not compel me to hold that the lease receivable, as a separate identifiable piece of property, held no value separate from the units. The facts showed that VP had a chose in action that it could have enforced to recover a debt of $32m in addition to resuming full rights of ownership of the freehold. The value of the freehold was not diminished by the lease receivable.

73 The SRO submitted that Mr Lonergan said that the market value of the lease receivable would be nil, not $32m. In fact Mr Lonergan said that on termination of the joint venture, CP would have virtually no assets and therefore would be unlikely to be able to meet its lease obligations and accordingly that the market value would either be nil (as CP had no assets) or $32m (if the holding company lent CP part of its sale proceeds). I repeat that s 74 is not about the consequences of actual winding up. It is about entitlement to property held by another entity. There is no justification for the Court inferring that VP's right to payment of the lease receivable was worth anything less than its full value on a notional termination of the lease.

74 Finally, I reject the SRO's contention that the lease receivable should be disregarded under s 71(3)(b) or s 71(3)(c) of the Act. Section 71 excludes certain kinds of property from being counted in the calculation of the unencumbered value of property for the purposes of s 71(2). Included in the exclusions are:

71(3) In calculating the unencumbered value of the property of a landholder for the purposes of subsection (2), property of any of the following kinds is not counted -

(b) money in an account at call or money on deposit with any person, negotiable instruments or debt securities;

(c) loans that, according to their terms, are to be repaid on demand by the lender or within 12 months after the date of the loan.

75 The lease receivable is not within the terms of either of those sub paragraphs.

76 In light of my finding that the assessment should be set aside, there can be no penalty payable but as submissions were put to the Court I should set out my views in case I am wrong in holding that the taxpayer has no liability to duty on the relevant acquisition.

77 Section 30 of the TAA provides relevantly as follows:

(1) The amount of penalty tax payable in respect of a tax default is 25% of the amount of tax unpaid, subject to this Division.

(3) The Commissioner may determine that no penalty tax is payable in respect of a tax default or notification default if the Commissioner is satisfied that -

(a) the taxpayer (or a person acting on behalf of the taxpayer) took reasonable care to comply with the taxation law; or ...

1. Reduction in penalty tax for disclosure before or during investigation

(1) The amount of penalty tax determined under section 30 is to be reduced by 80% if, before the Commissioner commences an investigation into a known or suspected tax default or notification default by the taxpayer, the taxpayer voluntarily discloses to the Commissioner, in writing, sufficient information to enable the nature and extent of the default to be determined.

79 In the taxpayer's objection to the assessment ("the objection"), the taxpayer sought a reduction of penalty under s 30(3) of the TAA or under s 31(1) of the TAA. The objection stated:

Section 30(3) of the Taxation Administration Act 1997 relevantly provides that the Commissioner may determine that no penalty tax is payable if satisfied that the taxpayer took reasonable care to comply with the relevant taxation law.

Snowy Hydro has taken reasonable care to comply with the relevant taxation law. Having regard to paragraph 24 of Revenue Ruling TAA.006, at the time of the acquisition it sought legal advice about whether it was liable to duty in respect of the acquisition of LVBV. Snowy Hydro took a reasonable view that there was no liability to duty. In particular, the question whether items are fixtures or chattels is a complex and difficult legal question, and Snowy Hydro has taken a reasonable view that those items are chattels. Further it sought a ruling from your Office on a voluntary disclosure basis prior to the commencement of any investigation by your Office. It also lodged a land acquisition statement under s80 of the Act before the commencement of any investigation by your Office.

For similar reasons, the Commissioner should exercise his discretion under s35 of the Taxation Administration Act 1997 to remit the Penalty Tax to nil.

Alternatively, under s31 of the Taxation Administration Act the amount of Penalty Tax should only be set at 5% of the Primary Tax. Sufficient information was given to the Commissioner to enable him to determine the nature and extent of any tax liability before commencement of any investigation.

80 The SRO declined to reduce penalty on this basis and gave the following reasons in his objection decision:

1. In this matter, the standard amount of penalty tax of 25% was decreased to 20% of the amount of tax unpaid pursuant to section 31(2) of the TAA on the basis that during the Commissioner's investigation, Snowy Hydro disclosed to the Commissioner sufficient information to enable the nature and extent of the tax default to be determined. The amount of penalty tax cannot be decreased by 80% and be charged at the rate of 5% of the amount of tax unpaid pursuant to section 31(1) because Snowy Hydro chose not to voluntarily disclose a liability to duty prior to the commencement of the investigation. Snowy Hydro submitted the Acquisition Statement disclosing 'Nil' liability despite the Private Ruling, which informed Snowy Hydro of its liability and possibility of imposition of penalty tax at a higher rate should an assessment be issued as a result of the investigation.
2. Remission of penalty tax in accordance with sections 30(3) and 35 of the Act and by applying the Ruling can depend on the level of 'reasonable care' taken by the taxpayer (or a person acting on behalf of the taxpayer) to comply with the Act.
3. As stated in paragraph 23 of the Ruling, the reasonable care standard requires taxpayers to keep complete and accurate records, make diligent efforts to understand and comply with the taxation law, seek expert advice on uncertain or complex matters and be honest in their dealings with the SRO. In paragraph 24 of the Ruling, there is a list of factors which, in the Commissioner's view, might contribute to showing that a taxpayer has taken reasonable care. In the present matter, it is considered that the penalty tax was correctly imposed at the rate of 20% as Snowy Hydro chose not to voluntarily disclose a liability to duty even after having received the Private Ruling, which informed Snowy Hydro of its liability. Accordingly, it is not considered that it is appropriate to remit the penalty tax in the circumstances as the Commissioner is not satisfied that Snowy Hydro and/or its representative took the appropriate level of reasonable care to comply with the taxation law.

81 In my view, the SRO erred in law in not reducing penalty to nil under s 30(3)(a) of the Act. It was a relevant consideration that the taxpayer had obtained legal advice as to the duty consequences of the transaction. It was also a relevant consideration that the liability to pay the tax involved difficult questions of characterisation of the units as fixtures and chattels and of construction of the Act about which other minds may differ from the view of the SRO.

82 The SRO should have taken these matters into account in determining whether it was satisfied that the taxpayer had taken reasonable care

83 I am also of the view that the penalty should have been reduced, in any event, under s 31(1) of the Act. The taxpayer voluntarily disclosed its putative liability when it made the request for a private ruling.

(d) subject to any argument on costs, the respondent is to pay the appellant's costs, including reserved costs, such costs to be taxed in default of agreement.

[1] Duties Act 2000 (Vic) s 79(1)(a)(i).

[2] Duties Act 2000 (Vic) s 71(2).

[3] Taxation Administration Act (Vic) 1997 Part 10.

[4] Duties Act 2000 (Vic) s 71.

[5] Duties Act 2000 (Vic) ss 71(2) and s 79.

[6] Duties Act 2000 (Vic) s 71(3)(g).

[7] Taxation Administration Act (Vic) 1997 s 110.

[9] Eon Metals NL v Commissioner of State Taxation (WA) 22 ATR 601, 604; National Australia Bank Ltd v Blacker [2000] FCA 1458; (2000) 104 FCR 288, 293; Stephen v Bell (1934) WALR 52, 55; Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR(NSW) 700, 712.

[10] NH Dunn Pty Ltd v L M Ericsson Pty Ltd (1979) 2 BPR 9241, 9244-9245 (Mahoney JA); Reid v Smith [1905] HCA 54; (1905) 3 CLR 656, 680-681; Eon Metals NL v Commissioner of State Taxation (WA) 22 ATR 601, 606.

[11] Wincant Pty Ltd v State of South Australia [1997] SASC 6287; (1997) 69 SASR 126, [20].

[12] NH Dunn Pty Ltd v L M Ericsson Pty Ltd (1979) 2 BPR 9241, 9244-45 (Mahoney JA), 9246-7 (Glass JA); McIntosh v Goulbourn City Council (1985) 3 BPR 9367, 9374 (Mahoney JA); National Australia Bank Ltd v Blacker [2000] FCA 1458; (2000) 104 FCR 288, 295-296.

[13] [2007] WASAT 302; (2007) 70 ATR 64.

[17] [2006] EWHC 63 (Comm).

[18] (1991) 22 ATR 601.

[20] Cf National Dairies WA Ltd v Commissioner of State Revenue [2001] WASCA 112; (2001) 24 WAR 70; Re Starline Furniture Factory Pty Ltd (in liq) (1982) 6 ACLR 312; Commissioner of Taxation v Metal Manufacturers Ltd [2001] FCA 365; (2001) 108 FCR 150.

[21] Commissioner of State Revenue (Vic) v Pioneer Concrete (Vic) Pty Ltd [2002] HCA 43; [2002] 209 CLR 651, 667 [44] (Gleeson CJ, Gummow, Kirby and Hayne JJ); Vopak Terminals Australia Pty Ltd v Commissioner of State Revenue [2004] VSCA 10; (2004) 12 VR 351, 378 [67], 383 [79] (Ormiston JA); DKLR Holding (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1981) 149 CLR 431.

The gas fired peaking facility having a nameplate rating of 300MW and located at the Site...

[23] John Alexander's Clubs Pty Limited v White City Tennis Club Limited; Walker Corporation Pty Limited v White City Tennis Club Limited [2010] HCA 19 (Unreported, French CJ, Gummow, Hayne, Heydon and Kiefel JJ) [44].

[24] Clause 3.1 Ownership of Joint Venture Assets:

Except as otherwise provided in this Agreement, all Joint Venture Assets shall be held by the Participants as tenants in common in their respective Percentage Interests.

Unless otherwise agreed unanimously by the Participants, no Participant shall during the continuance of this Agreement:

(a) seek partition or the establishment of a trust for sale; or

(b) take any action (whether by any court order or otherwise) for partition or sale in lieu of partition,

of any of the Joint Venture Assets. Each Participant waives any rights it may have under any applicable law to seek to do so.

[26] The percentage interest of 40% is derived from clause 2.1 of the Joint Venture Agreement.

[27] DKLR Holding Co (No 2) v Commissioner of Stamp Duties (1980) 1 NSWLR 510, 519 (Hope JA) cited with approval by the High Court in DKLR Holding Co (No 2) v Commissioner of Stamp Duties [1982] HCA 14; (1982) 149 CLR 431, 463 (Aicken J).

[28] Duties Act 2000 (Vic) s 74(7).

[29] Duties Act 2000 (Vic) s 74(4).

[30] DKLR Holding Co (No 2) v Commissioner of Stamp Duties (1980) 1 NSWLR 510, 519 (Hope JA) cited with approval by the High Court in DKLR Holding Co (No 2) v Commissioner of Stamp Duties [1982] HCA 14; (1982) 149 CLR 431, 463 (Aicken J)

[31] Joint Venture Agreement, cl 3.2(b).

[32] Joint Venture Agreement, cl 15.2(b).

[33] First Affidavit of Wayne Richard Lonergan sworn 24 December 2008, 12 [41].

[35] Transcript in this proceeding on 21 April 2010, 213.

[37] [2008] SASC 50; (2008) 73 ATR 495, 504 [46].

[38] Cf Commissioner of State Revenue (Vic) v Price Brent Services Pty Ltd [1995] VicRp 77; [1995] 2 VR 582; Commissioner of State Revenue v Bradney Pty Ltd (1996) 34 ATR 233; Vopak Terminals Australia Pty Ltd v Commissioner of State Revenue [2004] VSCA 10; (2004) 12 VR 351; Commissioner of State Revenue (Vic) v Pioneer Concrete (Vic) Pty Ltd [2002] HCA 43; [2002] 209 CLR 651.