Taxed Out: YTL, Newmont and the future of TARP

Vanja:

Welcome to Ashurst’s Legal Outlook and our Taxed Out Series. I’m Vanja Podinic, a partner in Ashurst’s Tax Controversy practice and I’m joined by my colleague, Colin Little.

In this episode, we're looking two (Australian) Federal Court decisions: Newmont and YTL that recalibrate how investors should approach Division 855 and Taxable Australian Real Property. We will cover what the court's decided, why those underlying rights mattered, and what this means for evidence, evaluation, and future transactions. Let's get started.

Today we’re unpacking the recent Australian Federal Court decisions that are important for any investor in Australian infrastructure and resources, whether you're a non-resident seller or resident taxpayer acquiring such assets from foreign residents: Newmont and YTL Power Investments are those decisions. What ties them together is Division 855, the principal asset test, and the definition of Taxable Australian Real Property (TARP). Both cases push back on the Commissioner’s broader view of what counts as “real property” for CGT purposes.

Colin:

I don't know about you Vanja, but I'm definitely "Taxed Out" at the end of this year. That’s the headline, in terms of real property - In both judgments, the Court rejected the idea that “real property” bears an ordinary, physical, bricks and mortar meaning for Division 855. Instead, it has a technical legal meaning, consistent with Australia’s treaty practices and the way the statute is framed, including the explicit add in for leases because, at common law, leases aren’t real property. Put simply: it’s not enough that an asset is a big immovable thing sitting on land. The analysis turns on legal interests, the estates and interest in land, so it is critical to gather evidence supporting the underlying rights. What each case highlights for me is that to succeed in tax litigation, not only do taxpayers need to be across the technical tax issues in play but the broader legal context of the relevant transaction or business, in this case property law.

Vanja:

Before we get into the cases, as you and I know, there still hasn’t been any update on Treasury's proposal to amend Division 855. We did see a consultation paper released in May 2024 announcing an intention to amend Division 855 and that was also to clarify and broaden the definition of ‘real property’, which may include, amongst other things, assets with a ‘close economic connection to Australian land and/or natural resources’, so as to bring in ‘leases or licenses to use land’, as well as ‘infrastructure and machinery installed on land situated in Australia, including land subject to a mining right’. There's been no further update since that particular consultation paper, so we expect that the government is probably waiting to see how these court cases progress.

Colin:

Starting with the YTL decision. YTL sold an interest in ElectraNet in 2022. ElectraNet has operated South Australia’s high-voltage transmission network since the state privatised electiricity in 2000. That privatisation was effected by the state in two key ways: First, the infrastructure and land was leased under separate 200 year leases. First, the Transmission Network Lease and the Transmission Network Land Lease; and secondly, by conferring rights and obligations under South Australian legislation, the Electricity Act and the Disposal Act. The question for the Court was whether the assets under the Transmission Network Lease were "real property in Australia (including a lease of land)".

Vanja:

Thanks Colin, and what we saw in Newmont, which was a decision following YTL, that was a corporate restructure which resulted in two non-residents selling their shares in Newmont Australia Pty Ltd, who conducted a gold mining activity in Australia. Division 855 query was whether the principle asset test was passed, and that in turn required a determination of whether the value of Newmont Australia's TARP assets exceeded the value of its non-TARP assets. The Commissioner was of the view that expensive mining plant and equipment sat on the TARP side because it met the definition of real property. However, the Court held that the mining and plant equipment in question was only "real property" within Division 855 if it formed part of the land according to general law principles, or if it forms part of a lease of land at general law. Now, that requires consideration of the taxpayer's actual estate or interest in the land, not simply whether there is a heavy large thing sitting on the land itself.

Colin:

In both cases, the Commissioner urged the Court to apply an “ordinary meaning” of real property that sweeps in structures on land like mining plant and equipment and electricity, ruling out any impact of the technical estate actually held, including as modified by the severance rules in state legislation, or the nature of the underlying legal rights in place for the assets on the land and their intended purpose. That approach was rejected by both Justices Hespe and Colvin with both judges separately accepting that Division 855 uses the technical legal meaning of real property. Division 855’s express inclusion of a lease of land supported that technical reading because, at general law, leasehold interests are not part of “real property” unless they're specifically included. The “ordinary meaning” in the explanatory memorandum was read as the ordinary meaning at general law, being the technical legal meaning. That was also consistent with the RCF IV decision with respect to the meaning of the term "lease of land" in Division 855.

Vanja:

So having looked at both cases and accepting that in both cases that the technical legal meaning applies, the judges really needed to look at the actual estate, the actual interest and the actual character of the rights being granted. It was that inquiry that compelled recourse to the statutory severance provisions in YTL, and the underlying mining tenement in Newmont. It was that compulsion that led Justice Hespe to consider the rights actually being granted with respect to the infrastructure under the Transmission Network Lease and the South Australian legislation, which led her to determine that the South Australian severance provisions applied to the rights, and deemed the infrastructure to be personal property and therefore incapable of being real property.

Colin:

And pausing there for a minute to look at the broader application, the wording of one of the severance provisions was critical, it went further than simply rebutting the common law presumption of fixtures, it actually deemed the infrastructure to be personal property. We have seen different wording being adopted in each of the states and territories in Australia for different industries and different assets, so any infrastructure subject to state severance provisions requires a detailed analysis to determine what impact that has on the nature of the assets being granted under contract or statute.

Vanja:

That's right, and it was in undertaking that analysis into what the nature of the interest was that led Justice Colvin to determine that it was not the freehold or leasehold interest that conferred the right to use the mining plant and equipment, it was the mining tenement, and under High Court authority in TEC Dessert, that mining tenement is personal property, not real property. Even though in obiter Justice Colvin said the plant and equipment would have been fixtures at the general law because they were affixed to the land, the fact that the right to use the assets arose from the mining tenement, not by a leasehold or freehold interest, meant that the legal character of the plant and equipment depended on whether the mining tenements, the instrument which gave the rights to lay and access the plant and equipment, were personal property.

Colin:

And of course, mirroring Newmont, we also got some extensive and helpful commentary on the valuation exercise that was required under Division 855. Firstly, in undertaking the Division 855 valuation, any allocation of a pool of value between the assets must be informed by the ultimate task of determining whether the underlying value of the shares is principally derived from Australian real property by undertaking the statutory calculation – and whilst that calculation refers to the sum of market values of TARP and non TARP assets, the market values referred to are those that belong to someone who owns all of those assets.

Vanja:

And just touching on that, on the valuation point you raised, any allocation of the overall pool of value between TARP and non-TARP assets had to reflect the fact that the market value of many of the assets in the overall bundle is derived from their use together in operation – so a mining operation in the case of Newmont. That has a synergistic value, and allocating this synergistic component of market value must be undertaken from the perspective of a party who is the holder of all those assets, and must reflect the fact that the control of all the assets is needed to obtain that synergistic value.

Colin:

Looking at what the decisions mean more broadly – they certainly mark significant developments in navigating the evolving tax landscape amid Australia's focus on infrastructure and renewables, but it still highlights the need to closely examine and classify evidence relating to underlying assets in a transaction. You need to take a bottom up approach, look at the assets first and gather evidence in support of what the underlying rights are. Even with the potential amendments to Division 855 which we discussed, the general principles in terms of how these cases work remain: First, it is critical to look at the actual legal estate in a contractual or statutory rights which are in play and then to gather evidence to demonstrate what is actually being granted, what are the limitations to those rights and what are the associated obligations. Then, once you've done that, go through the proper valuation exercise.

Vanja:

And as Australia accelerates towards net zero, more projects will bundle land access with significant above ground and subsurface infrastructure which we've already seen. The decisions remind taxpayers that tax law applies to the facts as found and requires an analysis of the underlying rights being granted by contract or statute. In terms of evidence gathering and the legal analysis, companion expertise like property, planning and infrastructure law, can support the legal determination of a taxpayer's rights and interests before applying the taxation law to those facts.

Colin:

Thank you Vanja, I think we've probably spoken enough about Division 855 for now.

Vanja:

I would say so.

Thank you for listening to this episode of Legal Outlook. I hope you found this episode insightful.

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