Commissioner of State Revenue v Snowy Hydro Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2010 0098

COMMISSIONER OF STATE REVENUE (Vic)	Appellant
	v
snowy hydro lIMITED (ACN 090 574 431)	Respondent

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JUDGES	MAXWELL P, REDLICH JA and ROBSON AJA
WHERE HELD	MELBOURNE
DATE OF HEARING	13 September 2011
DATE OF JUDGMENT	29 June 2012
MEDIUM NEUTRAL CITATION	[2012] VSCA 145
JUDGMENT APPEALED FROM	Snowy Hydro Limited (ACN 090 574 431) v Commissioner of State Revenue (Vic) [2010] VSC 221

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TAXES AND DUTIES – Dutiable transaction – Transfer of interest in landholding entity – Whether entity ‘land rich’ – Power station joint venture – Freehold land ‘made available’ to joint venture by one joint venturer – Land partly leased to joint venture partner – Unencumbered value of land – Whether value affected by contractual obligation to joint venture – Whether equitable interest created – Value of intangible assets – Whether right to receive rental separate asset from freehold title – Whether new argument permitted on appeal – Whether penalty tax payable – Whether taxpayer took reasonable care – Appeal allowed – Duties Act 2000 (Vic) ss 21, 71–4, 87, 272(1).

EQUITY – Trusts – Joint venture – Power station – Production and sale of electricity – Output owned by joint venturers in proportionate shares – Hedging contracts entered into by one joint venturer – Hedging revenue to be shared in proportion to respective interests in joint venture – Whether contract asset held on trust – Intention to be inferred from commercial arrangements – Whether fiduciary duties owed.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Ms H M Symon SC with Mr P Fox	Solicitor for the Commissioner of State Revenue
For the Respondent	Mr J De Wijn QC with Mr M Richmond SC and Mr C Peadon	Allens

Maxwell P
REDLICH JA
ROBSON AJA:

Summary

This appeal concerns the ‘land rich’ provisions in Chapter 3 of the Duties Act 2000 (Vic) (the ‘Act’). The provisions are complex but the informing concept is simple enough. Just as a transfer of land is a dutiable transaction,[1] so too is a transfer of an interest in a landholding entity (provided that the entity is ‘land rich’ as defined).[2]
[1]Duties Act 2000 (Vic) ss 7(1)(a), 10(1)(a).
[2]Ibid s 71(2).

Liability to duty can also arise where the relevant entity (though not a landholder itself) has what the Act characterises as ‘constructive ownership of land’, that is, where it is entitled to land through a ‘linked entity’.[3] According to the Commissioner, that is the category into which the present case falls.
[3]Ibid s 74(1).

The relevant entity was La Trobe Valley BV (‘LVBV’). The transaction which gave rise to the duty question was the acquisition by the respondent, Snowy Hydro Limited (the ‘taxpayer’), of all of the issued share capital in LVBV.

LVBV was not itself a landholder but its wholly-owned subsidiary was. That subsidiary was Valley Power (‘VP’), which owned land on which (at the valuation date) a power plant had been established (the ‘Peaker Facility’). LVBV was ‘entitled to land through a linked entity’ within the meaning of s 74 of the Act since, if VP were wound up, LVBV would be entitled to VP’s land and other property. Accordingly, for the purposes of these provisions, LVBV was treated as the holder of VP’s land and property.[4]
[4]Ibid ss 74(1), (3), (4).

The question for determination in the proceeding was whether, as the Commissioner had decided, LVBV was ‘land rich’ for duty purposes. That would only have been so if VP was ‘land rich’ at the relevant date (the date on which the ownership of LVBV changed hands), that is, if the value of the land owned by VP represented 60 per cent or more of the unencumbered value of all VP’s property.[5] The question can be expressed mathematically as follows. VP was ‘land rich’ if (at the relevant date):
where L was the value of the land owned by VP, and P was the value of all of VP’s property (including the land).
[5]Ibid s 71(2)(b).

In the present case, there were disputes over the numerator (L) and over the individual assets comprising the denominator (P). These disputes concerned both the nature of the assets to be valued and the extent to which the value of the respective assets was to be attributed to VP.

The key circumstance affecting the computation was that the power station was operated as a joint venture between VP and Contact Peaker Australia Pty Ltd (‘CP’), under the terms of a joint venture agreement between them (the ‘JVA’). VP had a 60 per cent interest in the joint venture, and CP 40 per cent. In relation to the numerator – the value of the land – the trial judge agreed with the Commissioner that the six gas turbine generator units (the ‘units’) were fixtures and, hence, were to be valued as part of the land.

Critically, however, her Honour upheld the taxpayer’s contention that, although VP had freehold title over the land, the effect of the JVA was to give CP a 40 per cent equitable interest in the land for so long as the joint venture subsisted. Once this equitable interest was taken into account, the value of VP’s interest in the land was reduced, such that the ‘land rich’ computation came out at substantially below 60 per cent. Accordingly, her Honour allowed the taxpayer’s appeal and set aside the Commissioner’s determination.

Before we identify the issues which fall for consideration on the appeal, it is necessary to deal with a matter which is no longer in issue between the parties but which affected her Honour’s consideration of other questions.

The notional ‘winding up’ under s 74

At trial, the Commissioner submitted that, for the purposes of identifying the assets of VP to which LVBV would be entitled if VP were wound up, the joint venture must be treated as if it had been terminated. This was said to be so because, if VP went into liquidation, the joint venture must inevitably (have) come to an end. Hence, even if (contrary to the Commissioner’s submissions) the effect of the JVA was to give CP an equitable interest in the land, that interest must be disregarded for the purposes of the ‘land rich’ computation. Upon termination of the joint venture, VP would hold the freehold title free of any such interest.

Her Honour rejected the Commissioner’s submission, pointing out that s 74(4) of the Act is not concerned with the practicalities of an actual winding-up of the ‘linked entity’. Rather, the focus is on the entitlement of the relevant entity to the assets of the linked entity. As her Honour said:

‘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) … 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.[6] 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.[7]

[6]The term ‘landholder’ is defined in s 71(1) as (any one of) a private unit trust scheme, a wholesale unit trust scheme or a private company.

[7]Snowy Hydro Limited (ACN 090 574 431) v Commissioner of State Revenue (Vic) [2010] VSC 221, [47] (‘Reasons’).

We respectfully agree with her Honour’s analysis. In view of her Honour’s conclusion about CP’s 40 per cent equitable interest in the land, it was unnecessary for her to consider the integers of the denominator. The Commissioner had conceded that, unless the full value of the land was included in the numerator, the contention that VP was ‘land rich’ must inevitably fail. Her Honour proceeded, nevertheless, to consider what the result would be in relation to the denominator on the assumption that (contrary to her conclusion) the application of s 74 did involve the notional winding-up of the joint venture, such that the equitable interest (which existed only for the duration of the joint venture) of CP had to be ignored.

Issues and conclusions

These reasons are divided into the following sections, reflecting the issues to be resolved:

A.THE NUMERATOR
A1.Were the generator units fixtures or chattels?
A2.Did CP have an equitable interest in the land?
A3.Was the joint venture agreement admissible?
A4.Was the value of the land affected by VP’s obligation to make it available to the joint venture?

B.THE DENOMINATOR
B1.Should the cap contracts have been included at 60 per cent or 100 per cent of valuation?
B2.Should the value of the lease receivable have been included as well as the value of the freehold?
B3.Was the spare unit committed to the joint venture by VP?

C.COMPUTATION
C1.What was the land rich ratio?
C2.Penalty tax.

For reasons which follow, we have concluded that:

(a) her Honour was right to hold that the units were fixtures;

(b) contrary to her Honour’s finding, CP had no equitable interest in the land, which had therefore to be included in the numerator at its full freehold value;

(c) no question of admissibility of the JVA arises;

(d) VP’s title to the land, and hence its value, was unaffected by the existence of its contractual obligation to commit the land to the business of the joint venture;

(e) contrary to her Honour’s finding (which assumed the termination of the joint venture[8]), the cap contracts should be included in the denominator at 60 per cent of valuation, rather than 100 per cent;
[8]See [81] below.

(f) her Honour was right to hold that the spare unit should be included in the denominator at 100 per cent of valuation; and

(g) contrary to her Honour’s finding, the lease receivable should not be included in the denominator.

On the basis of the agreed calculations supplied by the parties, these conclusions have the result that . This means that, at the date of valuation, LVBV was ‘land rich’ for duty purposes. We would therefore allow the Commissioner’s appeal and set aside the order of the trial judge. We would order that, save in respect of the imposition of penalty tax,[9] the taxpayer’s appeal from the Commissioner’s determination be dismissed.

A1.WERE THE GENERATOR UNITS FIXTURES OR CHATTELS?

[9]See [170]–[173] below.

Although the first issue addressed by the Commissioner was the judge’s finding that CP acquired a 40 per cent equitable interest in the land, the prior question is whether her Honour was right to conclude that the units were fixtures. The respondent has challenged that finding by notice of contention. (As there was no challenge to the trial judge’s findings of fact concerning the units, what follows in paragraphs 17–21 is taken from the reasons for judgment.)

The generator 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, which causes 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, of course, 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.

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. 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 by 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. 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 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. 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.

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. These features are typical of gas turbine generation units. They are reusable and, when the economics make 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. They were disassembled, shipped to Australia, refurbished, transported by truck to the Peaker Facility site, installed at the site and commissioned.

Both at trial and on the appeal, 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. They were bolted to the land, it was said, for their better use and enjoyment as chattels, 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 in order to keep the units in a stable position. This prevented excessive vibration which would otherwise impair the effective and safe use of the units.

The Commissioner accepted that the units must be bolted to the land for their safe and efficient operation, but contended that they were the most valuable components of the power plant and should be characterised as fixtures. The Commissioner relied on:

(a)the units’ high degree of annexation;
(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.

Her Honour summarised the applicable principles as follows:

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.[10] 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.[11]
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.[12] There is no one test that is conclusive of characterisation.[13] 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.[14]

[10]Eon Metals NL v Commissioner of State Taxation (WA) (1991) 22 ATR 601, 604 (‘Eon’); National Australia Bank Ltd v Blacker (2000) 104 FCR 288, 293; Stephen v Bell (1934) 37 WALR 52, 55; Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700, 712.

[11]NH Dunn Pty Ltd v LM Ericsson Pty Ltd (1979) 2 BPR 9241, 9244–5 (Mahoney JA) (‘Dunn’); Reid v Smith (1905) 3 CLR 656, 680–1; Eon (1991) 22 ATR 601, 606.

[12]Wincant Pty Ltd v State of South Australia (1997) 69 SASR 126, 142 [20].

[13]Dunn (1979) 2 BPR 9241, 9244–5 (Mahoney JA), 9246–7 (Glass JA); McIntosh v Goulbourn City Council (1986) 3 BPR 9367, 9374 (Mahoney JA); National Australia Bank Ltd v Blacker (2000) 104 FCR 288, 295–6.

[14]Reasons, [22] (emphasis added).

On appeal, the taxpayer contended that more was required than an intention that the item remain permanently on the land. The critical question, it was submitted, concerned the purpose for which the item was fixed. Her Honour had failed to recognise, so it was said, that the units had been fixed to the land solely to ensure their effective and safe functioning as components of a power plant. The affixation was not, therefore, connected in any relevant sense with the land or its use.

After referring to the authorities, her Honour said:

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

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.[15] The same considerations apply to the ancillary plant.
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.[16]

[15]Cf National Dairies WA Ltd v Commissioner of State Revenue (2001) 24 WAR 70 (‘National Dairies’); Re Starline Furniture Pty Ltd (in liq) (1982) 6 ACLR 312; Federal Commissioner of Taxation v Metal ManufacturesLtd (2001) 108 FCR 150.

[16]Reasons, [26]–[29] (emphasis added).

In our respectful opinion, her Honour’s conclusion was entirely correct, for the reasons which she gave. It was abundantly clear that the units were installed on the land ‘for the long term use of that site as a gas turbine electricity generation plant’. The taxpayer took issue with her Honour’s phrase ‘the use of the land as a power plant’, making the obvious point that it was the equipment, not the land, which produced the power. The phrase in question was, however, no more than a shorthand way of reiterating the conclusion which her Honour had more fully expressed – and explained – in the earlier (highlighted) passage.

Nor could it be doubted that the immediate purpose of affixing the units to the land was to make them stable, for the purposes of safe and efficient operation. But it would have been wholly artificial for the consideration of purpose to be confined to that immediate, practical purpose. The units were bolted down so that the entire site could function safely and efficiently as a power plant, to which purpose the site had been unconditionally, and indefinitely, dedicated.

As the Commissioner pointed out, there is a direct analogy with the conclusion arrived at by the Full Court of the Supreme Court of Western Australia in National Dairies.[17] That case concerned plant and equipment placed on land for the purposes of integration into a milk processing factory. The items of equipment were capable of being removed and relocated, either within the site or to a different site. The Full Court nevertheless upheld the trial judge’s conclusion that ‘the equipment was annexed to the land for the better enjoyment of the land for use as a milk processing plant’.[18]
[17](2001) 24 WAR 70.
[18]Ibid [52], [58].

The notice of contention must be dismissed.

A2.DID CP HAVE AN EQUITABLE INTEREST IN THE LAND?

The joint venture was unincorporated. That is, there was no joint venture vehicle.[19] VP and CP were the participants, their respective interests in the joint venture being as follows: VP 60 per cent, CP 40 per cent.[20]
[19]See Linfox Resources Pty Ltd v The Queen [2010] VSCA 319, [7]–[8].
[20]JVA cl 2.1.

VP was the legal owner of the land and of the generator units which, as earlier discussed, formed part of the land. (We will refer to the land and the units collectively as the ‘facility’.) VP had leased two of the six units to CP. This state of affairs was declared in the recitals to the JVA, in these terms:

A.VP is the owner of the Peaker Facility. VP has leased certain parts of the Peaker facility to CP.

B. VP and CP will have certain other rights in relation to the Business.
C.The Participants have agreed to enter into this unincorporated joint venture agreement to set out their respective rights and obligations in relation to the Business.

In clause 2.6 of the JVA, VP and CP agreed that they would ‘undertake the Business through the Joint Venture’. The Business was defined to mean ‘the operation and maintenance of the Peaker Facility … for the Purposes’. In turn, the ‘Purposes’ were defined as follows:

(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 the 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.

The primary output of the business was to be electricity,[21] and the ‘principal purpose’ was identified (elsewhere in the JVA) as ‘the distribution and supply of electricity’.[22] Of central importance to the present question is part 3 of the JVA, which provided as follows:
[21]JVA cl 5.2.
[22]JVA cl 8.6(d).

3.Joint Venture Assets and Assets provided by the Participants

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.

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.
(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 interest in the Joint Venture Assets described in paragraphs (b) to (h) inclusive of the definition of Joint Venture Assets other than the Construction Contracts.
(d)With effect from the Commercial Operation Date, VP makes available and dedicates to the Joint Venture exclusively for the Purposes and the duration of the Joint Venture all its interest in the Construction Contracts.

3.3 Custody and Use
Unless the Participants otherwise resolve, the Operator shall have custody of all Joint Venture Assets, which shall be used solely by the Operator for the Purposes.

3.4 Use of Joint Venture Assets
The Joint Venture Assets my be used only in connection with the Purposes.

3.5 Obligations
The Participants shall ensure that any payments to be made in relation to, and obligations arising in connection with, the Project Documents, the Financing Documents and the Joint Venture Assets are paid and observed by the Joint Venture in accordance with the Participants’ several obligations described herein.

3.6 Assets made available by the Participants
The Participants acknowledge that rights or assets (including rights to intellectual property) that may be used in connection with the Joint Venture may now and in the future be owned and held by a Participant individually and that arrangements may be made in accordance with this Agreement whereby the Participants may in the course of the activities of the Joint Venture:
(a)acquire the title to these rights or assets (so that they become Joint Venture Assets); or
(b)otherwise acquire rights to use those rights or assets.

3.7 Terms
The terms on which title to a right or the right to use a right or asset may be acquired as contemplated by clause 3.6 shall be agreed between the Participant concerned and the other Participants.

The definition of ‘Joint Venture Assets’ was in these terms:

Joint Venture Assets means:
(a)the use and occupation rights in relation to the Peaker Facility granted pursuant to clause 3.2(a) and (b);
(b)the Participants’ right, title and interest in the Project Documents;
(c)the Participants’ right, title and interest in any insurance policies taken out in relation to any part of the Business for the benefit of the Participants;
(d)any Generated Intellectual Property;
(e)the rights of the Participants in or to any Authorisation;
(f)electricity generated by the Peaker Facility before delivery to a Participant in accordance with clause 5;
(g)all other property acquired, leased or held for the purpose of 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; and
(h)the proceeds of sale of all or any part of the Peaker Facility following a decision of the Management Committee to decommission a unit or sell obsolete plant and equipment,
but does not include:

(i)electricity on and from the time of delivery to a Participant pursuant to clause 5.1;
(j)a Participant’s interest in any Other Output of the Peaker facility on and from the time of delivery to a Participant pursuant to clause 5.2;
(k)a Participant’s interest in or right under any Participants’ Agreement (other than the Lease) or any agreement for the sale or disposal of any electricity or Other Output of the Peaker Facility;
(l)a Participant’s interest or right under electricity hedges or other financial instruments relating to that Participant’s exposure to the NEM;
(m)any intellectual property licensed to the Joint Venture by a Participant or any third party; or
(n)any money or investment owned by a Participant.

It can be seen that, under clause 3.2(b), VP contracted to ‘make available and dedicate to the Joint Venture’ its freehold interest in the facility, for the purposes of the joint venture. Paragraph (a) of the definition of ‘Joint Venture Assets’ shows that the parties intended the promise in clause 3.2(b) to constitute the grant of ‘use and occupation rights’ in relation to the facility. Likewise, they intended CP’s promise under clause 3.2(a) – to ‘make available and dedicate to the Joint Venture’ all its leasehold interest in the facility – to constitute the grant of ‘use and occupation rights’ in relation to the leased units.

Thus, it was the ‘use and occupation rights’ which constituted the relevant Joint Venture Asset. What is in issue, however, is her Honour’s conclusion that the facility itself was a Joint Venture Asset. Her Honour based this conclusion on paragraph (g) of the definition of ‘Joint Venture Assets’. In her Honour’s view, the facility constituted ‘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 …’.[23]
[23]Reasons, [39].

In her Honour’s view, the purpose of clause 3.2

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.[24]

Her Honour continued:
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. Accordingly, CP’s equitable interest is to be taken into account in valuing LVBV’s attributed land holding for duty purposes.[25]

[24]Ibid [40] (emphasis added).

[25]Ibid [41] (emphasis added).

With great respect, we are unable to agree with this analysis. In our view, the conclusion which her Honour reached cannot be sustained on the proper construction of the agreement. Put shortly, there is nothing in the relevant clauses to suggest that either party had in contemplation that, by making the facility available for the purposes of the Joint Venture, VP would convey to CP a proprietary interest in the facility. All of the indications are to the contrary.

The intent of clause 3.2(b) is clear and unambiguous, in our view. In order to enable the joint venture business to be conducted, VP agreed to ‘make available’ the asset which it owned. No more was required for the achievement of the joint purpose. No broader intention should be inferred.

The parties themselves well understood, as they made clear in paragraph (a) of the definition of ‘Joint Venture Assets’, that by clause 3.2(b) VP was granting a right of ‘use and occupation’ of the asset – and no more. There was, moreover, an express acknowledgment in clause 3.6 that assets used in connection with the joint venture might be ‘owned and held by a Participant individually’. This provision aptly covered VP’s ownership of the freehold.

The parties adopted a definition of ‘Joint Venture Assets’ which distinguished, in the clearest of terms, between:

·the use and occupation rights (paragraph (a)); and
·‘all other property acquired, leased or held’ (paragraph (g)).[26]

This distinction is mirrored in the structure of clause 3.2 itself, which clearly distinguishes between:
·the grant of use and occupation rights in respect of the facility (clauses 3.2(a) and (b)); and
·the quite separate promise given by each joint venturer (clause 3.2(c)), to make available ‘all its interests’ in the other Joint Venture Assets, as described in paragraphs (b) to (h) of the definition.

[26]Emphasis added.

That this was the parties’ intention becomes even clearer when the legal implications of the contrary view are considered. As appears from paragraph 38 above, her Honour’s conclusion was that the JVA itself had effected a change in proprietary interests. On this view, each joint venturer had under the terms of the JVA transferred its proprietary interest in the facility to the joint venture, to be held by the joint venturers as tenants in common. In other words, VP had by clause 3.2(b) transferred to the joint venture its freehold title in the facility, to be held by the joint venturers as tenants in common in their respective shares. Likewise, clause 3.2(a) was to be seen as having effected a transfer of CP’s leasehold interest in the two leased units, to be held by the joint venturers as tenants in common.

On this view of the JVA, the intention of the parties was that, for the duration of the joint venture, CP would be a joint owner – as tenant in common – of the freehold. In other words, CP would be a joint legal owner of the facility. As they would be tenants in common of the same (freehold) proprietary interest, there could be no question of CP becoming merely an equitable owner. Nor could there be any question of CP taking a lease of property of which it had joint ownership.

As Robson AJA pointed out in argument, such a transfer of (part) legal ownership to CP would have required a registrable transfer. The taxpayer properly conceded that this was so. The JVA made no provision for such a transfer, and no such instrument was brought into existence. The taxpayer’s submission, nevertheless, was that the JVA operated to create an equitable tenancy in common.[27]
[27]See Delehunt v Carmody (1986) 161 CLR 464.

In our view, there is an air of unreality about the taxpayer’s contention that commercial parties could be taken to have intended – without having said so – to effect a transfer between them of 40 per cent legal ownership of a very valuable asset. As the Commissioner argued, the implausibility of the proposition is demonstrated by the contrasting approach which the parties adopted in relation to the leasing of the two units.

When VP as the owner of the freehold did wish to grant CP a proprietary interest – by leasing two of the units – its intention to do so was stated with unambiguous clarity and was effectuated by conventional means - by an agreement for lease and then a lease. Each of those documents was drawn with the obvious care and attention to detail which a transaction of this scale would inevitably require. Every other aspect of the joint venture was likewise extensively documented. It is highly improbable that there could have been any intention to transfer part ownership of the freehold, when the parties had made no statement to that effect and when no such documentation had been brought into existence.

The taxpayer was constrained to argue that the existence of an intention to effect such a transfer was to be inferred from paragraph (g) of the definition of ‘Joint Venture Assets’. According to the argument, it would have been ‘remarkable’ if the parties had not dealt with the facility itself in defining ‘Joint Venture Assets’. It was pointed out that paragraph (a) of the definition dealt only with ‘use and occupation’ of the facility, and that the facility was not listed amongst the express exclusions from the definition. That being so, it was said, the phrase ‘other property held by the joint venture’ in paragraph (g) should be read as reflecting an (unstated) intention to commit the freehold to joint ownership.

The argument is untenable, in our view. First, the parties had dealt with the facility, explicitly, in clauses 3.2(a) and (b), and in the corresponding paragraph (a) of the definition of ‘Joint Venture Assets’. The ownership position was correctly stated in Recital A.[28] Nothing more needed to be said on that subject. Paragraph (g) was expressly dealing with ‘all other property’, that is, property not covered by other paragraphs of the definition. Secondly, there is no justification for inferring, from entirely general words in a ‘catch all’ definition, an intention to share ownership of very valuable land, when the operative clauses of the agreement evinced no such intention.
[28]See [32] above.

Thirdly, the other documentary evidence reflects the position as straightforwardly described in the recitals to the JVA. The Trading Agreement,[29] for example, identifies VP as ‘owner of the Peaker facility’[30] and CS as ‘the lessee … of certain units and equipment at the Peaker Facility’.[31] Unsurprisingly, the instructions to the valuers on both sides were given on precisely that basis. For example, Ernst & Young, a valuer retained by the taxpayer, recorded its instructions in these terms:

[VP] owns 100 per cent of the generation plant and leases 40 per cent of the plant to CP …

[29]See [75] below.

[30]Clause 1.1 – definition of ‘Agreement of Lease’.

[31]Recital A.

The taxpayer also sought to derive assistance from paragraph (h) of the definition of ‘Joint Venture Assets’, which included amongst those assets:

[T]he proceeds of sale of all or any part of the Peaker Facility following a decision of the Management Committee to decommission a unit or sell obsolete plant and equipment.

In accordance with clause 3.1, such proceeds of sale would be held by the joint venturers as tenants in common on a 60/40 basis. The taxpayer submitted that the agreement to share the proceeds of sale of the facility indicated ‘quite clearly’ that the parties intended the facility to be owned jointly.

There is a short answer to this submission. It is that the owner of an asset can promise to share the proceeds of the sale of that asset with another party without having transferred – indeed, without ever having had any intention to transfer – part ownership of the asset to that other party. By itself, an agreement to share the proceeds of sale says nothing about ownership. In the present case, of course, there was a compelling commercial reason for VP not to transfer ownership of the facility to CP, namely, that such a transfer would have been a dutiable transaction. Again, the taxpayer properly conceded that this was so. In the circumstances, CP’s commercial interest was adequately protected by VP’s promise that, if and when (any part of) the facility was sold, the proceeds would be shared between them in accordance with their joint venture percentages.

In the alternative, it was contended, the contractual promise to share the proceeds of sale of the facility was by itself sufficient to give CP an equitable interest in the facility. Apart from anything else, this contention ignores the conditional nature of paragraph (h), which would only be engaged if the Management Committee decided ‘to decommission a unit or sell obsolete plant and equipment’. That is, there might never be a sale. This point is reinforced by clause 15.2 (set out in the next paragraph), which shows that the parties contemplated VP’s continued ownership of the facility following termination of the JVA. More fundamentally, the proposition that a promise to share proceeds of sale of an asset is sufficient, without more, to constitute the promisee an equitable owner of the asset is unsupported by authority and contrary to principle, and must be rejected.

Finally, it is necessary to refer to part of the termination clause in the JVA, which was in these terms:

15.2 Assets
If the Joint Venture terminates pursuant to clause 15:
(a)the Lease shall be terminated;
(b)the freehold in the Site and the Peaker Facility will revert to VP in its own right; and
(c)all the other Joint Venture Assets shall be realised by the Participants and the net proceeds of such realisation shall be distributed amongst the Participants in proportion to their respective Percentage Interests.

The taxpayer placed particular reliance on clause 15.2(b). It was said that the reference to the freehold ‘reverting to VP in its own right’ necessarily implied that VP had – elsewhere in the JVA – ceded (part of) its freehold ownership to CP for the duration of the joint venture. This argument suffers from the same flaw as those we have already considered. The parties having nowhere expressed an intention that there should be any such change of ownership, it would defy commercial common sense to infer the existence of such an intention from non-specific language in an ancillary clause of the agreement dealing with termination.

What VP had done, of course, was to lease part of the facility to CP. Clause 15.2(a) made express provision for termination of the lease in the event that the joint venture came to an end. That is why clause 15.2(b) spoke of the freehold ‘reverting’ to VP in its own right. As lessor, VP held the reversionary interest. So far as the non-leased parts of the facility were concerned, they would ‘revert’ to VP ‘in its own right’ in the sense that they would be free of the use and occupation rights previously enjoyed by the joint venture.

Constructive trust

In the course of argument, the taxpayer advanced a quite different basis, not mentioned in its detailed written submissions, for the proposition that the JVA gave CP an equitable interest (as to 40 per cent) in the facility.

This alternative argument assumed, contrary to the primary submission, that there was no express or implied intention to give CP a proprietary interest. The argument assumed that CP’s rights (as joint venturer) under clause 3.2(b) were purely contractual, but contended that CP’s ability to seek equitable relief to protect those rights gave it an equitable interest in the land. According to the submission, if VP’s promise to make the facility available to the joint venture were enforceable at the suit of CP, by injunction or by order for specific performance, that would give CP an equitable interest in the land.

Both in argument and in a supplementary written submission, the taxpayer invoked the well-known line of authority holding that a purchaser of real estate under an uncompleted contract of sale has an equitable interest in the property.[32] The written submission cited the following passage from the joint judgment of Deane and Dawson JJ in Stern v McArthur:[33]

As Deane J pointed out in Keen Corporation Ltd v Walter Reid Trading Pty Ltd, it is not really possible with accuracy to go further than to say that the purchaser acquires an equitable interest in the land sold and to that extent the beneficial interest of the vendor in the land is diminished. The extent of the purchaser’s interest is to be measured by the protection which equity will afford to the purchaser. That is really what is meant when it is said that the purchaser’s interest exists only so long as the contract is specifically enforceable by him. Specific performance in this context does not mean specific performance in the strict or technical sense of requiring the contract to be performed in accordance with its terms. Rather it encompasses all of those remedies available to the purchaser in equity to protect the interest which he has acquired under the contract. In appropriate cases it will include other remedies, such as relief by way of injunction, as well as specific performance in the strict sense. As Sir Frederick Jordan put it: ‘Specific performance in this sense means not merely specific performance in the primary sense of the enforcing of an executory contract by compelling the execution of an assurance to complete it, but also the protection by injunction or otherwise of rights acquired under a contract which defines the rights of the parties’.
To put the matter in this way is to say little more than that the equitable interest of a purchaser under a contract for the sale of land is that which equity recognizes and protects: Hewett v Court, per Deane J. The relationship of trustee and beneficial owner will certainly be in existence when the purchase money specified in the contract has been paid, title has been made or accepted and the purchaser is entitled to a conveyance or transfer. At that point the purchaser is entitled in equity to the land and the vendor is a bare trustee: McWilliam v McWilliams Wines Pty Ltd, per McTiernan and Taylor JJ. Otherwise there is no unanimity upon when the relationship of trustee and beneficial owner arises: Chang v Registrar of Titles, per Mason J. But that does not mean that before that time has arrived the purchaser may not be entitled to a lesser equitable interest than ownership.

[32]See the discussion in Nolan v Collie (2003) 7 VR 287, 296–7 [24]–[28]; see also s 73(1) of the Act.

[33](1988) 165 CLR 489, 522–3 (emphasis added, citations omitted).

The written submission also referred to authorities which were said to illustrate the application of this ‘principle’ to:

(a) options to purchase land, ‘to find that the optionee has a caveatable interest in the land the subject of the option prior to exercise’;[34]
(b)a floating charge prior to crystallisation, ‘to find that the chargee has an equitable interest in the charged property’;[35] and
(c)an agreement for lease, ‘to treat as an equitable lease conferring an equitable interest in the lessee’.[36]

[34]Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2010] NSWSC 29, [566]–[567]; GPT RE Ltd v Lend Lease Real Estate Investments Ltd [2005] NSWSC 964, [51].

[35]Wily v St George Partnership Banking Ltd (1999) 84 FCR 423, [42]–[46].

[36]Chan v Cresdon Pty Ltd (1989) 168 CLR 242, 252–3.

The true basis and scope of this doctrine remains a matter of some uncertainty.[37] But, whatever its scope, it can have no application to a contract of the kind in issue here, where the freehold owner has agreed to do no more than make its land available for ‘use and occupation’ for the purposes of the conduct of a business. That is, as the Commissioner submitted, in the nature of a contractual licence. It may be assumed that, if VP had threatened to make the facility unavailable for the purposes of the joint venture, CP could have sought injunctive relief to restrain the threatened breach of contract. It is quite another matter, of course, to contend that the availability of that equitable remedy had the effect of constituting CP an equitable owner of the land. None of the authorities referred to by the taxpayer gives any support to such a proposition.
[37]See Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315, 332–3 [53]–[54].

It follows, in our view, that the JVA meant what it said. That is, VP as the freehold owner of the facility held the land subject to a contractual obligation to make it available to the joint venture for the agreed purpose. CP’s only proprietary interest in any part of the facility was its leasehold interest in two of the units, which VP had granted CP under the terms of the (agreement for) lease.

A3. WAS THE JOINT VENTURE AGREEMENT ADMISSIBLE?

At trial, the Commissioner objected to the taxpayer being able to rely on the JVA to support its argument that CP acquired an equitable proprietary interest in the facility. The Commissioner invoked s 272(1) of the Act, which provides as follows:

An instrument that effects a dutiable transaction or is chargeable with duty under this Act is not available for use in law or equity for any purpose and may not be presented in evidence in a court or tribunal exercising civil jurisdiction unless –
(a) it is duly stamped; or
(b)it is stamped by the Commissioner or in a manner approved by the Commissioner.

The Commissioner’s argument was a simple one. The JVA effected – or was said by the taxpayer to have effected – a dutiable transaction. It had not been stamped and it was, accordingly, not able to be ‘presented in evidence’. The trial judge rejected this contention, holding that s 272(1) did not apply since it had not been established that the JVA was ‘an instrument that effects a dutiable transaction’.

The submission for the Commissioner on appeal was that her Honour ought to have deferred a decision on the admissibility question until she had decided whether, as the taxpayer contended, the JVA transferred an equitable interest in land to CP. Having concluded that it did transfer such an interest,[38] her Honour should have been satisfied that the JVA did record a dutiable transaction and was therefore chargeable. Her Honour should then have concluded, on the authority of the High Court decision in Halloran v Minister Administering National Parks and Wildlife Act 1974,[39] that the JVA was not admissible and could not be relied on by the taxpayer in this proceeding to establish the equitable interest contended for.
[38]See [38] above.
[39](2006) 229 CLR 545, 571 [81]–[82].

In view of the conclusion we have reached on the question of an equitable interest, the admissibility issue falls away. We have concluded, as set out in Part A2 of these reasons, that the JVA did not operate to convey to CP any proprietary interest in the facility. No other basis having been advanced for regarding the JVA as ‘an instrument that effects a dutiable transaction’, the provisions of s 272(1) have no application.

A4. WAS THE VALUE OF THE LAND AFFECTED BY VP’S OBLIGATION TO MAKE IT AVAILABLE TO THE JOINT VENTURE?

The final question concerning the numerator is whether the unencumbered value of the facility for the purposes of s 71(2)(a) of the Act was affected by VP’s contractual obligation to make the land available to the joint venture for the purposes of its undertaking.

Chapter 2 of the Act charges duty on transfers of dutiable property. Under s 20(1), the ‘dutiable value’ is the greater of the consideration for the transaction and ‘the unencumbered value of the dutiable property’. Section 22(1), in turn, defines the ‘unencumbered value’ of dutiable property as:

the amount for which the property might reasonably have been sold in the open market—
(a)in the case of a transfer of dutiable property on a sale of the property—at the time the contract of sale was entered into;
(b)in any other case—at the time the dutiable transaction occurred—

free from any encumbrance to which the property was subject at that time.

In Commissioner of State Revenue (Vic) v Pioneer Concrete (Vic) Pty Ltd,[40] the property in question was an estate in fee simple. Under the contract of sale, the purchaser agreed to give the vendor a right to tip waste on certain portions of the land. The High Court held that the provisions of the contract of sale subjected the purchaser to contractual obligations

but they did not create any proprietary interest which qualified its title to the land. And they did not qualify [the vendor’s] title to the land on the date of the sale, which is the time to which [the statute] directs attention.[41]

[40](2002) 209 CLR 651 (‘Pioneer Concrete’).

[41]Ibid 666 [41].

The Commissioner submitted that s 22, and Pioneer Concrete, likewise governed the determination of the unencumbered value of land for the purposes of the ‘land rich’ provisions. On that basis, it was said, VP’s obligation to make the facility available to be used for the purposes of the joint venture business was, like the ‘tipping rights’ in Pioneer Concrete, a contractual obligation the existence of which did not qualify VP’s title to the land. What was to be valued, therefore, was VP’s freehold title, disregarding the ‘use and occupation’ rights granted under the JVA.

The submission for the taxpayer, on the other hand, was that the valuation of interests in land for the purposes of the ‘land rich’ provisions was governed by a ‘different statutory scheme’ from that considered in Pioneer Concrete. Counsel relied on ss 72(1) and (2) of the Act, which provide as follows:

(1)For the purposes of this Part, a ‘land holding’ is an interest in land other than the estate or interest of a mortgagee, chargee or other secured creditor or a profit à prendre.
(2)An interest in land, however –
(a)is not a land holding of a unit trust scheme unless the interest is held by a trustee of the scheme in the capacity of trustee; and
(b)is not a land holding of a private company unless the interest of the private company in the land is a beneficial interest.

It was critically important, so it was said, that s 72(2) directed attention to the ‘beneficial interest’ of the landholder. The taxpayer accepted that, on the authority of Pioneer Concrete, the existence of the contractual obligation did not qualify VP’s title, but submitted that the existence of the contractual obligation enforceable by CP did affect the value of VP’s beneficial ownership. Beneficial ownership implied that the owner of the land was entitled to all of the fruits of the land and could deal with the land as it wished and, it was said, VP did not have such unfettered enjoyment of its land.

The Act provides its own clear answer to this submission. Section 87(1) of the Act is in these terms:

The provisions of this Act for ascertaining the value of transfers chargeable with ad valorem duty apply in the same way to an acquisition statement under this Part and the value of land holdings mentioned in it.

As might have been expected, the Act adopts a uniform approach to the valuation of interests in land. The approach to valuing ‘landholdings’ for the purposes of Chapter 3 of the Act is exactly the same as that required as under Chapter 2. We note that, when they instructed valuers to prepare valuations for the purposes of this proceeding, the taxpayer’s solicitors drew specific attention to ss 22 and 87 as being the applicable provisions for ‘land rich’ purposes. There was no suggestion in those instructions that any ‘different statutory scheme’ was applicable.

The ‘unencumbered value’ of VP’s landholding is thus to be assessed in accordance with s 22(1), as interpreted by the High Court in Pioneer Concrete. What is to be valued is the estate or interest in land which the landholder has at the date of valuation, ignoring any contractual rights which a third party may have in relation to the land.[42] In the present case, CP having no equitable interest in the land, VP was the legal and beneficial owner of the freehold in its entirety. (The effect of CP’s leasehold interest is dealt with, separately, later in these reasons.)

B. THE DENOMINATOR
B1. SHOULD THE CAP CONTRACTS HAVE BEEN INCLUDED AT 60 PER CENT OR 100 PER CENT OF VALUATION?

[42]The taxpayer’s valuer had been instructed, correctly, to ignore all contractual arrangements.

Contemporaneously with the execution of the JVA, VP and CP entered into what was called a ‘Trading Agreement’. The Recitals to that Agreement were in these terms:[43]
[43]The Trading Agreement refers to CP as ‘CS’ and to VP as ‘the Trader’. To avoid confusion, we have substituted the JVA abbreviations ‘CP’ and ‘VP’ in the appropriate places.

A.CP is the lessee under the Agreement to Lease in respect of certain units and equipment at the Peaker Facility.

B. CP is entitled to the delivery of electricity from the Peaker Facility.
C.CP wishes to engage an experienced trader to make bids to NEM,[44] secure hedges and other financial instruments for the Project. This document records the terms and conditions upon which VP will perform the Services for CP.

[44]National Electricity Market, as defined in the National Electricity Code.

Under the Trading Agreement, VP entered into certain hedge contracts, which generated substantial revenue for the joint venture. These have been referred to in the proceeding as the ‘cap contracts’. The contracts were in VP’s name but, under the provisions of the Trading Agreement, VP received 40 per cent of the cap contract revenue on behalf of CP.[45]
[45]See [97] below.

As will appear, the asset constituted by the right under the cap contracts to receive contract revenues (the ‘contract asset’) was valued at $82 million. The question for determination is whether, as the taxpayer maintained, the contract asset should be included in the denominator (as an item of VP’s property) at its full value.

The Commissioner contended that, on the proper construction of the relevant clauses of the Trading Agreement, VP had made and held the cap contracts as agent for CP, and had received the revenue from them in that capacity (at least as to 40 per cent). It followed, according to the submission, that 40 per cent of the value of the contracts was held by VP on trust for CP. The taxpayer, on the other hand, contended that VP had entered the contracts in its own right and was both legal and beneficial owner of the contract asset in its entirety. It followed, so the taxpayer submitted, that the contract asset should be included in the denominator at 100 per cent of valuation.

In our view, it was the clear intention of the joint venturers that VP would hold contracts of this kind on trust, to the extent of 40 per cent, for CP. The beneficial ownership of the contract asset was therefore divided between them in proportion to their respective interests in the joint venture. The value of VP’s 60 per cent interest in the contract asset was, accordingly, 60 per cent of the agreed value of the asset.

The preferable analysis, we think, is that there was an implied trust of the contracts. That is, it was the intention of the parties that VP would enter hedging contracts as trustee for the joint venturers, whose respective beneficial interests in the contracts would accord with their proportionate interests in the venture. But, even if VP in discharging this function was acting as agent rather than as trustee, the result would be the same. On no view could the joint venture arrangements support a conclusion that VP was intended to be the absolute owner of the contract asset. As will appear, the taxpayer’s expert valuer expressed a similar opinion about the commercial substance of the arrangements.

On the approach which the judge took to the denominator assets, it was unnecessary for her to reach a final conclusion on this question. As noted earlier, her Honour’s consideration of the denominator assets was premised on the assumption that (contrary to her own conclusion) the valuation should be done as if the joint venture agreement had been terminated. On that view, even if the Commissioner was right that the value of the cap contracts was affected by VP’s obligation to account for 40 per cent of the revenue, the notional termination of the JVA brought that obligation to an end. As a result, the full value of the cap contracts had to be included in the denominator, not merely 60 per cent.[46]
[46]Reasons, [63].

We turn first to the trust analysis.

The intention to create a trust

The applicable principles are well established. Courts will recognise the existence of a trust in a commercial setting, notwithstanding the absence of an express statement of intention to create a trust, when

it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. … In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention.[47]

Regard may be had to ‘what could fairly be inferred to be the interests and expectations of the two sides to the transaction in question’.[48] Subjective intentions are irrelevant.[49] With trusts as with contracts, the Court is concerned not with ‘the real intentions of the parties, but with the outward manifestation of those intentions.’[50]

[47]Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, 121 (Mason CJ and Wilson J), 148 (Deane J); Walker v Corboy (1990) 19 NSWLR 382, 384–5 (Priestley JA), 387–9 (Clarke JA), 396–7 (Meagher JA) (‘Walker’); Byrnes v Kendle (2011) 243 CLR 253, 277 (Gummow and Hayne JJ, with whom French CJ agreed at 263), 288–9 (Heydon and Crennan JJ) (‘Byrnes’).

[48]Walker (1990) 19 NSWLR 382, 385.

[49]Twinsectra Ltd v Yardley [2002] 2 AC 164, 185 [71].

[50]Byrnes (2011) 243 CLR 253, 275 [59] (Gummow and Hayne JJ); 290 [114]–[115] (Heydon and Crennan JJ).

Against that background, we turn to examine the relevant agreements. As the Commissioner correctly pointed out, the investigation must extend to the provisions of the JVA itself, for they provide the framework within which the provisions of the Trading Agreement are to be considered.

The ‘Services’ which VP undertook to provide to CP were defined in the Trading Agreement as follows:

(a)acting as intermediary of CP pursuant to clause 4;
(b)administering the sale of CP’s Share of the electricity sent out into the NEM by the Peaker Facility (‘CP’s Electricity’) and CP’s share of any other product or service from time to time produced from, or provided by, the Peaker Facility by:
(i)submitting availability and firm price offers for CP’s Electricity;
(ii)issuing on behalf of CP, all necessary invoices;
(iii)otherwise attending to the administration of the sale of CP’s Electricity and CP’s share of such other products and services; and

(c)the development and implementation of electricity risk management strategies and the pricing, negotiation and execution of electricity and gas hedge and [sic] contracts for and on behalf of CP.[51]

[51]Emphasis in original.

The essence of VP’s engagement, therefore, was to arrange the sale of ‘CP’s Share’ of the electricity produced by the facility and to maximise the revenue generated, including by means of hedging contracts. In clause 1.1 of the Trading Agreement, ‘CP’s Share’ was defined to mean:

CP’s share of the electricity generated by and the Other Outputs of the Peaker Facility, determined in accordance with clause 5 of the JVA …

Clause 5 of the JVA is headed ‘Delivery of Output’ and is in these terms:

5.1 Participants to take in kind
Each Participant shall own and have the right and obligation to take in kind and separately dispose of and shall take a share in proportion to its Percentage Interest of all electricity generated by the Peaker Facility.
5.2Other Output
The Participants acknowledge that the primary output of the Business is to be electricity but if and to the extent there is any Other Output of the Business, each Participant shall own and have the right and obligation to take in kind and separately dispose of and take a share in proportion to its Percentage Interest of that Other Output (or the proceeds of such Other Output).

5.3 Point of Interconnection
The point of delivery of the output of the electricity generated by the Peaker Facility shall be the point of connection of the droppers to the racked lines to the Peaker Facility on the 500kV side of the generator transformer of each unit.
5.4Risk
Possession of and risk in each Participant’s share of electricity shall pass to the Participant at the point of delivery referred to in clause 5.3.

The intention of the joint venturers as expressed in these clauses of the JVA is unambiguously clear. As appears from clause 5.1, each joint venture participant was to own its proportionate share of the electricity generated by the facility, and would have both the right and the obligation to take its share ‘in kind’. Relevantly for present purposes, each of VP and CP would have the right (and the obligation) to ‘separately dispose of’ its proportionate share of the electricity. Both possession of, and risk in, the relevant share of the electricity would pass to the relevant participant at the point of delivery.[52]
[52]Clause 5.4.

It was thus a fundamental feature of the joint venture that the participants would have individual ownership, and power of disposal, of their respective shares in their electricity. This feature is also illustrated by the definition of ‘Participating Share’, that being the (disposable) interest of each participant in the joint venture.[53] So far as is relevant, a ‘Participating Share’ was defined in clause 1.1 of the JVA to mean:

the undivided interest of that Participant’s rights, liabilities and obligations:
…
(d) relating to the ownership of and the right and benefit as a tenant in common to receive in kind and to dispose of the Participant’s Percentage Share of electricity generated by the Peaker Facility or Other Output separately for its own account …[54]

[53]See JVA clause 11.2.

[54]Emphasis added.

Unsurprisingly, the parties to the JVA here acknowledged that each joint venturer had the right to dispose of its own share of the electricity ‘separately for its own account’. The proceeds of sale would, of course, belong to the joint venturer which owned the electricity, and would be treated accordingly in the joint venture accounts. Clause 6.4 of the JVA provided as follows:

6.4 Participant Income
The Participants must receive the income from the Business which must be paid to each Participant’s Participant Bank Account in proportion to its respective Percentage Interest.

Accordingly, CP was the owner of 40 per cent of the electricity generated and was entitled – and bound – to dispose of the electricity ‘separately for its own account’. CP was entitled to receive 40 per cent of the income of the business, which was to be paid into its ‘Participant Bank Account’.

The financial statements prepared by the joint venturers reflected this position. In the 2004 Joint Venture Annual Report, for example, cash inflows totalling $7.76 million were attributed to the joint venturers in amounts precisely reflecting the 60/40 split in the ownership of the electricity. Their respective ‘Participants Account Balances’ as at 31 December 2004 also precisely reflected their respective shares. The Notes to the accounts were unambiguous:

Income represents output of the Joint Venture that belongs to each joint venturer in proportion to its interests in the Joint Venture. The Joint Venture does not earn income in its own right.[55]

[55]Emphasis added.

As appears from paragraph (b) of the definition of ‘Services’,[56] VP was to ‘administer the sale of CP’s Share of the electricity sent out into the [National Electricity Market] by the Peaker Facility’. VP was obliged to do whatever was necessary to secure appropriate returns for CP, including by ‘the development and implementation of electricity risk management strategies’ and by entering into hedge contracts. The entry of the cap contracts is to be understood in that context.
[56]See [85] above.

The operative parts of the Trading Agreement were as follows:

4. TRADING AND MARKETING
4.1 Appointment
(a)CP hereby appoints VP, and VP accepts the appointment, to provide the Services on and subject to the terms of this Agreement.
(b)In entering into Contracts for the purposes of the performance of the Services, VP is authorised to describe itself as the disclosed agent of CP.

4.2Compliance with Policy
In the provision of the Services, VP must act in good faith and use all reasonable commercial efforts to comply with:
(a)the Trading and Marketing Policy;
(b)the Project Documents;
(c)the Financing Documents;
(d)the Participants Agreements;
(e)all laws and Authorisations relevant to the performance of the Services; and
(f)Good Electricity Industry Practice.

4.3 Change of Policy
The parties may agree from time to time to change the Trading and Marketing Policy. Any such agreement shall be recorded in writing between them.

4.4 Reports
VP will provide a report within 14 days of the end of each month (commencing with the month in which the Effective Date occurs) to CP on the performance of the Services in that month including:
(a)revenue earned by CP and the Peaker Facility during that month;[57]
[57]Emphasis added here and in (e) below.
(b)reasonable details of any Contracts entered into on behalf of CP and in respect of the Peaker Facility;
(c)reasonable details of any expenditure incurred by VP pursuant to clause 5.1(a) and (b);
(d) the performance of VP against the requirements and standards of the Trading and Marketing Policy;
(e)the Payments received and made on behalf of CP under clause 5.3; and
(f)any other matter reasonably requested by CP to be reported on which impacts on the performance of the Services or the Payments.

4.5Contact [sic] Information, Review and Approval
(a)CP may from time to time reasonably request information from VP in respect of the Services or any matter that is the subject of this document.
(b)VP will respond promptly, and in any event within 10 Business Days of such a request for information.
(c)VP shall:
(i)notify CP a reasonably sufficient period prior to entering into any Contract on behalf of CP (other than a contract to be entered into under paragraph (c) of the Trading and Marketing Policy) (‘New Contract’) of the proposed terms and conditions of such New Contract; and
(ii)not enter into a New Contract without CP’s written approval provided if CP does not notify VP that it does not approve the New Contract 5 days from the date of receiving a notice under clause 4.5(c)(i), CP will be deemed to have approved such New Contract.

5. PAYMENTS
5.1 Trading Fee
(a)VP shall be reimbursed monthly for its reasonable costs, expenses and outgoing in relation to the provision of the Services in an amount to exceed $192,000 Escalated per annum.
(b)VP shall be reimbursed monthly for the Relevant Percentage of all expenses incurred in relation to its registration as intermediary.[58]
[58]Emphasis in original.

5.2 Payment of Trading Fee
Each of the amounts to be reimbursed under clauses 5.1(a) and 5.1(b) must be paid by CP to VP within 30 days of the end of the month to which they relate.
5.3Payments received for or made on behalf of CP
(a)The parties acknowledge that CP’s Share of any monies received from NEMMCO or from third parties to Contracts has been received for and on behalf of CP.[59]
(b)the parties acknowledge that some of the Contracts may require payments to be made to third parties. VP is authorised to make CP’s Share of those payments from the moneys it receives on behalf of CP under clause 5.3(a).

5.4 Payments to CP
Subject to clause 5.5 and to the Financing Documents in respect of any Termination Payment (as defined in the Financing Documents) VP will, in relation to the Payments pay those amounts into the CP Bank Account within one day of receipt of those amounts in cleared funds (less any payments under 5.3(b)).[60]

[59]Emphasis added.

[60]Emphasis added. ‘Payments’ was defined in clause 1.1 to mean ‘the amounts described in clause 5.3(a), less those amounts required to be paid under clause 5.3(b)’.

Much of the argument on the appeal concentrated on clause 5.3 and, in particular, on the defined term ‘Contracts’. Clause 1.1 contained the following definition:

‘Contracts’ means the contracts entered into by VP on its own behalf or on behalf of CP pursuant to paragraph (c) of the definition of Services.[61]

[61]Emphasis added.

The Trading Agreement thus contemplated that VP might enter into hedge contracts on its own behalf as well as entering into contracts on behalf of CP. At the same time, the definition of ‘Services’ referred only to VP entering into hedge contracts ‘for and on behalf of CP’. It seems, therefore, that when VP entered a hedge contract on its own behalf, this was not to be regarded as a provision of services to CP.

For present purposes, however, this is a matter of no consequence, since the provisions of clause 5.3 applied to all ‘Contracts’, that is, to contracts entered into by VP on its own behalf and to contracts entered into by VP on behalf of CP. Under clause 5.3(a), VP acknowledged unconditionally that, when it received moneys under a hedge contract, it received only 60 per cent of those moneys in its own right. The remaining 40 per cent – referred to as ‘CP’s Share’ – was received by VP ‘for and on behalf of’ CP. We note that ‘CP’s Share’ was defined in the Trading Agreement to include ‘the Relevant Percentage of Contracts attributable to CP pursuant to this Agreement’.

The submission for the taxpayer sought to characterise clause 5.3 as containing ‘an acknowledgment which … amounts to no more than a contractual obligation to account’. That ‘mere contractual obligation’ did not, so it was submitted, detract from VP’s beneficial ownership of the entire contract asset. It was said in argument that, even if there were a trust of the income derived, this did not create a trust of (the relevant proportion of) the asset.

This submission must be rejected. As we have pointed out, the intention of the parties with respect to the cap contracts is to be discerned from the entirety of their arrangements, including in particular the JVA. Clause 5.3 can be seen to be entirely consistent with the character and purpose of the joint venture arrangements.

As we have said, it was of the essence of this joint venture that the electricity generated by the facility be marketed at such times, and by such means, as would maximise the commercial returns to each participant. The parties took care in the JVA to make explicit that there would be no joint ownership of the electricity produced, and no joint receipt of income.[62] Instead, each joint venturer was to be the owner of its percentage share of the output.
[62]JVA clause 4.2 states: ‘The Participants acknowledge that it is their intention not to derive or receive income jointly as a result of the activities of the Joint Venture.’

As noted earlier,[63] it was an express purpose of the joint venture to ‘enable the delivery of electricity generated by the Peaker Facility to the respective Participant or their agent’. It was for each participant to maximise the revenue generated on the basis of its share of the electricity output, including by means of hedge contracts. Since VP was ‘an experienced trader’ (as CP acknowledged in the recitals to the Trading Agreement), the task of negotiating and executing hedge contracts was given to VP. In the ‘Marketing and Trading Policy’ (Schedule 1 to the Trading Agreement), VP and CP acknowledged and agreed that ‘the practicalities of trading the various ownership shares … necessitate a single marketing and trading function’.
[63]See [33] above.

In that commercial context, there is nothing surprising about VP’s acknowledgment in clause 5.3(a) of the Trading Agreement that, whenever it received any income under a hedge contract (whether the contract was entered into by VP in its own right or on behalf of CP), it received CP’s share of that income on behalf of CP. It was, after all, CP’s income. The revenue generated was directly referable to CP’s electricity output. This was no mere ‘contractual obligation to account’. VP had to pay into CP’s account those amounts which it had received on behalf of CP, after deducting CP’s share of any outgoings. And each month, VP had to report to CP on ‘revenue earned by CP … during that month’.

The taxpayer submitted that ‘the absence of an express declaration of trust’ was significant. The authorities are clear, however, that formal words are not necessary to create a trust.[64] Another contra-indication was said to be that VP had no ‘obligation to keep moneys received under the Cap Contracts separate from its own monies’. But, as appears from the contractual terms we have set out, VP was expressly obliged to treat CP’s share of the contract revenue as a separate fund, out of which CP’s share of the hedge contract outgoings was to be paid before the balance was paid into CP’s account. It was CP’s income, and was treated accordingly in the joint venture accounts.
[64]See, for example, Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491, 505; Byrnes (2011) 243 CLR 253, 288–9.

[80]Reasons, [72].

The appeal

The Commissioner’s grounds of appeal and written submissions for the appeal specifically challenged her Honour’s conclusion in this respect. According to the submission:

There was no basis for the trial judge to treat the value of the [lease] obligation as an item of property separate from the land, as she did at Reasons, [72]. The obligation was undertaken by way of rent in respect of the lease by VP to CP of two of the Peaker Facility units and associated equipment. The rent concerned, being that payable under clause 4.2 of the Lease, was calculated by reference to VP’s debt payments but, nevertheless, rent, characterised as such by the document, a lease, in which the obligation is to be found. Consistently with the reasoning in Balgra at [47], that rental reflected VP’s exploitation of its estate in fee simple in the units:
A right to physical possession when granted in exchange for rent does not reduce the estate in fee simple or its value in the hands of the owner. It is correctly viewed as the way in which the owner has chosen to exploit the undiminished estate in fee simple.

The taxpayer’s written submissions, on the other hand, maintained that there was no ‘double counting’. The Commissioner’s position was said to be ‘wrong because it fails to recognise that there are two separate items of property involved – the land and the lease receivable’. The taxpayer’s appeal submissions included two alternative calculations of the denominator, each of which included both the (agreed) unqualified land valuation ($140 million) and the value of the lease receivable ($32 million).

For reasons which follow, we would uphold the Commissioner’s submissions. In our view, the value of VP’s property as computed for the denominator could not properly include both the agreed value of VP’s unqualified freehold interest in the land and the value of its right as lessor of the two units to receive rent. Such a computation would not have complied with the Act, since it would have ‘double counted’ the value of VP’s right to lease the land.

Axiomatically, one of the rights of the freehold owner of land is the ability to lease some or all of the land and derive rent in return. That was the point made by Gray J in Balgra:

A right to physical possession when granted in exchange for rent … is correctly viewed as the way in which the owner has chosen to exploit the undiminished estate in fee simple.[81]

Accordingly, when freehold title is valued, the valuer would be expected to take into account all of the rights of the freehold owner, including the right to earn rental income. The taxpayer properly conceded in argument that this was so. There was no evidence led at the trial to suggest that the agreed value of $140 million was arrived at on any other basis.

[81]Balgra (2008) 73 ATR 495, 504 [47].

It follows that, to the extent that VP’s ability to lease the facility was relevant to the valuation in the present case, the valuer had had to consider the likelihood of a tenant being found and the terms on which the land could be leased. In other words, the value of VP’s ability to lease the facility had been taken into account in the valuation of the freehold at $140 million. The existence of the lease receivable was merely a manifestation, or confirmation, of that ability. To have included the value of the lease receivable in the denominator, in addition to the value of the land, would therefore have involved double counting, as the Commissioner correctly submitted.

In the course of argument on the appeal, the taxpayer appeared to concede that this was so. In response to questions from the bench, counsel for the taxpayer accepted that, because of the basis on which the unqualified value of $140 million was arrived at, the taxpayer could not validly include in the denominator both the value of $140 million for the land and the value of $32 million for the lease receivable.

The taxpayer maintained, however, that this was not the end of the matter. It was said to be possible to ‘avoid the double counting’ by reducing the figure of $140 million, in both numerator and denominator. This could permissibly be done, it was submitted, ‘because the 140 is a hypothetical figure’. The taxpayer proposed that this Court should approach the ‘land rich’ computation by valuing the land on a different basis. Instead of the land being valued on an unqualified basis, as had been done by agreement for the trial, the land should now be valued on an ‘as leased’ basis. Reliance was placed on the following statement in Pioneer Concrete, made in reference to the sale of a property subject to a lease:

What was sold was the freehold interest subject to a pre-existing lease; the reversion. The pre-existing lease qualified the nature and extent of the proprietary interest that was available to be transferred. Subject to the possibility that it might be said to be an encumbrance, it was to be taken into account in considering the nature, and therefore the value, of the property that was transferred.[82]

[82](2002) 209 CLR 651, 668–9 [49].

The taxpayer submitted that, once VP’s proprietary interest was valued on this basis – that is, on the basis that it had only the reversionary interest in the two leased units – the lease receivable could properly be included in the denominator as a separate asset without double counting. The taxpayer accepted that no such valuation of VP’s interest in land had been undertaken for the purposes of this proceeding, but maintained that the absence of such a valuation presented no obstacle to this Court’s adopting the new basis of valuation. This was said to be so because, once the value of the lease receivable was included in the denominator, the land rich ratio would inevitably fall below 60 per cent, whatever the reduced value of the land might be when it was valued on an ‘as leased’ basis.

Counsel for the Commissioner objected that this was a very significant change in the taxpayer’s case, which had only emerged towards the end of the second day of the appeal hearing. The Court accordingly gave the parties leave to file supplementary submissions dealing with this issue.

The supplementary submissions

The Commissioner’s supplementary contentions were as follows. It had been common ground throughout the proceeding that the value of the land – and hence the numerator in the ‘land rich’ ratio – was $140 million. The same figure had, of course, to be included in the denominator. Up to and including the written submissions filed by the taxpayer for the appeal, the taxpayer’s case had been that it was not ‘double counting’ to include in the denominator both the lease receivable ($32.18 million) and the land at the agreed (unqualified) valuation of $140 million.[83] At no point had the taxpayer contended that the value of the land was liable to be reduced by the amount of the lease receivable.
[83]See [131] above.

The taxpayer’s supplementary submission did not dispute this account of the history of the proceeding. The submission maintained, nevertheless, that the way to avoid double counting was not to exclude the lease receivable from the denominator but to change the basis of valuation of the land. In support of this submission, the taxpayer provided references to the evidence of its expert valuer, Mr Lonergan.

In his first report, Mr Lonergan noted that (as at the acquisition date) LVBV had recognised in its consolidated financial statements the following separate assets:

(a)the lease receivable – valued at $32 million; and
(b)property, plant and equipment, including the unimproved land and improvements, the six units and other plant and equipment – valued at $92.3 million.

In Mr Lonergan’s opinion:

The value of the reversionary interest in the two leased Units should be nil or nominal given the fact that at the inception of the Lease, VP and CP had anticipated that the two Units would be decommissioned during the term of the lease …
In simple terms, despite legal ownership, in an economic sense, LVBV no longer controlled the two Units. The asset it now controlled was a lease receivable and a reversionary interest in the parts of the Site to which access and usage was granted to CP. It would be double counting if both the lease receivable and the two leased Units are recognised as assets in VP’s financial statements. VP had correctly recorded the lease receivable as an asset and wrote off the parts of the power plant leased to CP accordingly …[84]

(As the Commissioner’s appeal submission correctly pointed out, the highlighted passage supported his contention that it would be double counting to include both the lease receivable and the value of the land including all six units.)

[84]Emphasis added.

According to the taxpayer’s supplementary submission, Mr Lonergan’s evidence showed that VP’s interest in the land could be valued, as it were, by disaggregating that interest into two separate segments, the first segment being the leased portion (valued, on the basis of the lease receivable, at $32 million), the second segment being the remainder (valued at $92 million, on the basis that VP’s reversionary interest in the two leased units was nil). According to the supplementary submission:

[I]f the lease receivable of $32.18 million is a separate item of property of [VP] as at 17 October 2005, as the [taxpayer] contends, then if any adjustment is to be made to the value of LVBV’s beneficial interest in the land to avoid double counting it would be to reduce that value (and hence both the numerator and the denominator in the land rich ratio would be reduced by the same amount) rather than the lease receivable being excluded from the denominator. This reflects the fact that upon crystallization of the lease receivable under clause 4.2 of the Lease on 17 October 2005, the Lease continues for the remainder of the term with no rent.
However, this does not make a material difference to the calculation of the land rich ratio of LVBV as at 17 October 2005 because, as shown in the Agreed Land Rich Calculations document dated 21 September 2011, there are only 2 scenarios where the [Commissioner] can win and in each the lease receivable is excluded. On any of the other six scenarios, if the land value is reduced to avoid double counting, then there is a corresponding reduction in the land rich ratio.[85]

[85]Emphasis added.

This submission was said to derive further support from the ‘Joint Statement of Experts’. This statement was prepared, pursuant to an order of the trial judge, by Mr Lonergan and the expert valuer engaged by the Commissioner, Ms Murone of Pitcher Partners. The taxpayer’s submission made particular reference to Appendix B to that joint statement, entitled ‘Ms Murone’s Calculations’. Two things may be noted about these calculations. First, none of them purports to aggregate the two values of $140 million for the land and $32 million for the lease receivable. Like Mr Lonergan’s evidence, Ms Murone’s reinforces the Commissioner’s ‘double counting’ objection. Her first report made this clear.[86]
[86]P Munroe, Snowy Hydro Ltd v Commissioner of State Revenue – Expert Opinion, 19 June 2009, [1.3.3(c)].

Secondly, in all but one of the six calculations in Appendix B, Ms Murone records the total value of the improved land as $140 million, and includes nothing for the lease receivable. In only one of the calculations – said to have been made on the assumption that ‘the entities are not considered to be linked’ – does Ms Murone adopt the approach of disaggregating the land asset into the ‘rental stream’ for the leased units (valued at $32 million) and the other four units (valued at $99.8 million).

What is meant by the stated assumption that ‘the entities are not considered to be linked’, and how that assumption relates to the valuation task which the Act prescribes, is not clear. (We note that Ms Murone disclaimed any expertise as a property valuer.) Appreciating the true significance of this evidence is made the more difficult by the fact that the joint report must be read against the background of the lengthy sequence of reports which preceded it – three reports from Mr Lonergan and two from Ms Murone, each in turn responding to the other’s opinion and, in some instances, modifying opinions previously expressed.

Conclusion

In our view, the Commissioner’s grounds of appeal on this issue should be upheld. For the reasons we have given, it would be double counting to include in the denominator both the land at the agreed value of $140 million and the lease receivable at a value of $32.18 million. Her Honour erred in rejecting that part of the Commissioner’s case.

We would refuse the taxpayer leave to advance, for the first time on the appeal, the alternative argument that the land could, and should, have been valued on a different basis. What we have said about the valuation question demonstrates that the course of the trial would almost certainly have been different if the taxpayer’s case had been put in the quite different way raised for the first time during the appeal hearing.[87]
[87]Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 437–8; Coulton v Holcombe (1986) 162 CLR 1, 7–8.

Expert evidence would have had to be called about whether, in a case where freehold land was partly leased, the owner’s freehold title could be valued in the disaggregated fashion now contended for. As it was, the taxpayer elected to conduct the proceeding on the basis of the agreed valuation of the land as unleased property, evidently content to argue before the judge – and again in its written submission in this Court – that both the value of the lease receivable ($32 million) and the unqualified value of the land ($140 million) could be included in the denominator without double counting.

We are not in a position, nor in the circumstances is it necessary, to resolve the question whether, as a matter of valuation methodology, an estate in fee simple could properly be valued in this way, that is, by separately valuing the estate in reversion and the entitlement to rent. Certainly, such of the valuation evidence as bore on this question was inadequate to enable it to be resolved.

As noted earlier,[88] the taxpayer in Balgra had purported to advance a valuation prepared on the basis that the freehold owner had two ‘separate and distinct’ interests, each of which could be separately valued. Gray J rejected the proposition saying, in relation to the purported valuation of the reversionary interest, that it had been made:

on the instructed assumption that [the building] was untenanted … The author explained that he did not know why he had been so instructed but he proceeded to prepare a valuation on this hypothesis. The instruction was presumably given in an attempt to simulate a situation where rental income was not treated as relevant to the valuation of the real property.
The instructions presented a methodology difficulty. The author had on no prior occasion been asked to make a valuation on such an assumption. Notwithstanding the assumption the author employed the valuation methodology of assessing the present day value of a future rental income stream. This methodology paradoxically appeared to directly contradict his instruction. However, this was the only methodology that could, in the author’s view, be adopted. He assumed the building to be untenanted and then assessed the value having regard to the period over which and the terms on which the building could be tenanted. The author explained that the hypothesis meant that one had to consider the difficulty of finding tenants, offering incentives and then to allow for the delays in tenanting the building. Unsurprisingly, this led to the much reduced value. … The hypothetical valuation exercise … and the difficulties confronted might suggest that Balgra’s approach to the case involved a fundamental misapprehension of the meaning of real property.[89]

[88]See [127]–[128] above.

[89](2008) 73 ATR 495, 502 [32]–[33] (emphasis added).

As also noted earlier, Gray J accepted as ‘appropriate and correct’ a valuation of the building based – in orthodox fashion – on the present value of the income stream generated by the leases. The purported valuation of the reversion (which did not take into account the rental income stream, which had been valued separately) was ‘an inappropriate valuation’.

As his Honour suggested, there would seem to be obvious difficulties of principle with such an approach. To value the right to derive rental separately from valuing ‘the rest’ of the freehold would be to separate out one of the rights which together comprise the freehold owner’s proprietary interest. To do so would be contrary to law. The estate in fee simple is a single estate,[90] a single asset, albeit that the owner is variously characterised as having ‘a bundle of rights’[91] and ‘an aggregation of powers’.[92] As we said earlier, VP was the legal and beneficial owner of the freehold in its entirety.[93] That was the asset which had to be valued.

B3.WAS THE SPARE UNIT COMMITTED TO THE JOINT VENTURE BY VP?

[90]Megarry & Wade, The Law of Real Property (7^th ed 2008) [3–035].

[91]Yanner v Eaton [1999[ 201 CLR 351, 366 [17].

[92]R v Wei Tang (2008) 237 CLR 1, 56 [140].

[93]See [74] above.

The final asset question may be disposed of shortly. It concerns the spare unit, that is, the seventh generator unit which was held in reserve in case one of the six units in operation should fail or need to be taken out of service for maintenance. It was common ground that VP was the sole owner of all seven units. They had been purchased in two lots, one of four and one of three.

The trial judge treated the spare unit as part of the facility. According to the Commissioner’s appeal submission, her Honour erred in so finding. The submission relied on the definition of ‘Peaker Facility’ in the JVA, as meaning

the gas fired Peaker Facility having a nameplate rating of 300MW and located at the Site, Barton’s Lane, Traralgon.

According to the argument, the facility comprised only six units. Since each unit was capable of producing 50 megawatts of power, only six were required to produce the requisite output of 300 megawatts.

On this view, the spare seventh unit did not form part of the facility. Hence the seventh unit was not caught by clause 3.2(b) of the JVA, under which VP committed all its (freehold) interest in the facility to the joint venture. The spare unit must therefore be viewed as falling within paragraph (g) of the definition of ‘Joint Venture Assets’, being ‘other property held for the purpose of the joint venture’. On that basis, and by application of clause 5.2(c) of the JVA, the spare unit had been committed to the joint venture to be held by the joint venturers as tenants in common. VP therefore had only 60 per cent ownership of the spare unit.

This submission is untenable, in our view. There is nothing in the JVA to suggest that the parties meant to draw a distinction between the six units which were in use at any one time and the spare unit which was seen as necessary backup for the operation of the facility. Nor would such a distinction make any commercial sense. The spare unit was, plainly enough, part of the facility (comprising the land and the generating plant) which VP made available to the joint venture. It would be a strange result indeed if VP were held to have retained sole ownership of the six units, two having been leased to CP, but to have committed the seventh unit to joint legal ownership with CP. Without express words, we would not impute to the parties an intention to treat one unit in such a dramatically different way from the other six.

It follows that the spare unit, which was agreed to be a chattel, should be included in the denominator as a separate asset of VP’s, at 100 per cent of valuation.

C. COMPUTATION
C1. WHAT WAS THE LAND RICH RATIO?

The parties helpfully prepared an agreed series of alternative computations, based on the possible outcomes on the various appeal issues. The conclusions we have reached mean that the relevant computation is that set out in the parties’ Calculation 2, which was as follows:

Asset

Value

Ratio

Land

$140,044,420

Remaining tangibles (100% of $12m)

$12,323,500

Cap contracts (60% of $82m)

$49,200,000

Remaining intangibles (agreed)
60% of ($243m–$152m–$82m)

$5,179,248

Total denominator

$206,747,168

67.7%

It follows that LVBV was correctly assessed as ‘land rich’ for duty purposes, and the challenge to the Commissioner’s decision fails.

C2. PENALTY TAX

Section 30 of the Taxation Administration Act 1997 (Vic) (the ‘TAA’) provides relevantly as follows:

30 Amount of penalty tax
(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 …[94]

[94]Emphasis added.

Section 31(1) of the TAA provides:

31 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.

In its objection to the assessment, the taxpayer sought a reduction of penalty under s 30(3) or 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 s 80 of the Act before the commencement of any investigation by your Office.
For similar reasons, the Commissioner should exercise his discretion under s 35 of the Taxation Administration Act 1997 to remit the Penalty Tax to nil.
Alternatively, under s 31 of the Taxation Administration Act the amount of Penalty Tax should only be set at 5 per cent 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.

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

In this matter, the standard amount of penalty tax of 25 per cent was decreased to 20 per cent of the amount of tax unpaid pursuant to s 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 per cent of the amount of tax unpaid pursuant to s 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.
Remission of penalty tax in accordance with ss 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.
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 per cent 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.

The question of penalty tax did not fall for decision at trial, because of her Honour’s conclusion that the Commissioner’s decision must be set aside. Her Honour did, nevertheless, record her views on the issue, as follows:

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.
The SRO should have taken these matters into account in determining whether it was satisfied that the taxpayer had taken reasonable care.
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.[95]

[95]Reasons, [81]–[83].

On appeal, the Commissioner submitted that it had been open to him to conclude that the taxpayer had not taken reasonable care to comply with the Act. First, it was said, the only evidence that legal advice had been obtained by the taxpayer was an assertion to that effect in the taxpayer’s objection. According to the submission:

In the absence of the advice itself and knowledge of its substance, it was open to the Commissioner not to be satisfied that the [taxpayer] received advice or unqualified advice, that it was not liable for duty.

Secondly, the Commissioner’s submission drew attention to the fact that the taxpayer’s request for a private ruling was not made until 10 March 2006, some five months after the transaction and two months after the due date for payment of duty in respect of the transaction. No explanation was given for the delay.

It is instructive to examine the relevant Revenue Ruling published by the Commissioner,[96] which makes clear the relevance of the taxpayer’s having sought legal advice and requested a private ruling. Under the heading ‘Reasonable care’, the Ruling says:

Penalty tax will not be imposed where taxpayers can show that they have taken reasonable care in the conduct of their tax affairs. The reasonable care standard requires taxpayers to keep complete and accurate records, make diligent efforts to understand and comply with the law, seek expert advice on uncertain or complex matters and be honest in their dealings with the SRO. In determining whether or not a taxpayer has taken reasonable care, the SRO will consider a range of factors including the taxpayers’ knowledge of tax legislation, commercial experience, access to expert advice and familiarity with the English language.

[96]Revenue Ruling TAA.006, State Revenue Office of Victoria, August 2002. As of 25 July 2007, this Ruling was replaced by Revenue Ruling TAA.007.

The Ruling then lists a number of ‘situations’ which, it is said, ‘may indicate that a taxpayer or a representative of a taxpayer has taken reasonable care’. The following are relevant for present purposes:

(a)the taxpayer has maintained appropriate and proper recording systems;
(b)the taxpayer has taken reasonable steps to be aware of his taxation obligations and has familiarised himself with the relevant legislation so as not to overlook the legislative requirements;
…
(d)the taxpayer has sought professional advice or private rulings for uncertain or complex matters where no public ruling applied or his circumstances differed from those described in a public ruling;
(e)the taxpayer has acted in good faith in applying any independent tax advice received;
(f)the taxpayer has observed any private ruling received …

In our view, the Commissioner ought to have concluded that the taxpayer had taken reasonable care, within the meaning of s 30(3)(a). No penalty tax should have been imposed. Our reasons are as follows.

First, the seeking of legal advice shows, unambiguously, that the taxpayer wished to know whether it had any obligations under the Act and, if so, what they were. Seeking legal advice was both necessary and sufficient for that purpose. The non-disclosure of the content of the advice did not, in the circumstances of this case, justify any inference that the taxpayer was acting otherwise than in good faith in applying the advice. Nor did the non-payment of the tax. As this litigation has demonstrated, the question of liability to duty raised issues of considerable complexity.[97]
[97]Cf Challenger Listed Investments Ltd v Commissioner of State Revenue (2010) 80 ATR 630, 644 [32].

Secondly, the seeking of a private ruling was a step taken by the taxpayer on its own initiative. It was under no obligation to do so.[98] To do so was, as the Commissioner conceded in his submissions at trial, a prudent step for the taxpayer to take. We accept, of course, that the seeking of a ruling does not postpone the time for payment of duty, but it does further signify, in our view, the taking of care to ensure compliance. In the circumstances of this case, that conclusion is not affected either by the fact that the request for the ruling came after the due date, or by the fact that the taxpayer continued thereafter to dispute its liability.
[98]North Ryde RSL Community Club Limited v FCT (2002) 121 FCR 1, 21–3 [72]–[85]; and M L C Limited v FCT (2002) 126 FCR 37, 53 [53].

Although the Commissioner has otherwise succeeded on the appeal, we will order that his determination be varied so far as it concerned the imposition of penalty tax.

- - -

Asset	Value	Ratio
Land	$140,044,420
Remaining tangibles (100% of $12m)	$12,323,500
Cap contracts (60% of $82m)	$49,200,000
Remaining intangibles (agreed) 60% of ($243m–$152m–$82m)	$5,179,248
Total denominator	$206,747,168	67.7%

[2012] VSCA 145

29 June 2012