Supreme Court New South Wales Medium Neutral Citation: SPIC Pacific Hydro Pty Ltd v Chief Commissioner of State Revenue (No 2) [2021] NSWSC 486 Hearing dates: On the papers Date of orders: 7 May 2021 Decision date: 07 May 2021 Jurisdiction: Equity Before: Payne JA Decision: (1) Pursuant to s 101(1)(a) of the Taxation Administration Act 1996 (NSW), revoke the Duties Notice of Assessment No 1656952346 dated 21 July 2017; (2) Pursuant to s 101(1)(d) of the Taxation Administration Act 1996 (NSW), remit the matter to the defendant for determination in accordance with the Court's reasons, namely that the assessment of duty to the plaintiff is based upon a valuation of $177,292,257 for the leasehold interests in land; (3) The defendant repay the plaintiff any amount already paid pursuant to the Notice of Assessment No 1656952346 dated 21 July 2017 in excess of the amount of the further assessment the subject of order (2), plus interest; (4) The defendant pay the plaintiff's costs. Catchwords: TAXES AND DUTIES – land tax – liability – valuation of leasehold interests in land – form of orders COSTS – whether a differential award of costs should be made – no separable issues Legislation Cited: Duties Act 1997 (NSW), s 155(1) Taxation Administration Act 1996 (NSW), ss 101(1)(a), 101(1)(d) Cases Cited: Commissioner of State Revenue (WA) v Placer Dome Inc (2018) 265 CLR 585; [2018] HCA 59 Federal Commissioner of Taxation v Resource Capital Fund III LP (2014) 225 FCR 290; [2014] FCAFC 37 James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 SPIC Pacific Hydro Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 395 Category: Consequential orders Parties: SPIC Pacific Hydro Pty Ltd (Plaintiff) Chief Commissioner of State Revenue (Defendant) Representation: Counsel: D Batt QC, P Herzfeld (Plaintiff) R Seiden SC, D Woods (Defendant) Solicitors: PWC (Plaintiff) Crown Solicitor's Office (Defendant) File Number(s): 2018/185963 Publication restriction: Nil. judgment 1. On 20 April 2021, I delivered judgment in SPIC Pacific Hydro Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 395. The reasons that follow assume familiarity with that decision. In the principal decision, I identified the orders I proposed to make as follows: 1. Pursuant to s 101(1)(a) of the Taxation Administration Act 1996 (NSW), revoke the Duties Notice of Assessment No 1656952346 dated 21 July 2017; 2. Pursuant to s 101(1)(d) of the Taxation Administration Act 1996 (NSW), remit the matter to the defendant for determination in accordance with the Court's reasons, namely that the assessment of duty to the plaintiff is based upon a valuation of $201,621,227 of the interests in land; 3. The defendant repay the plaintiff any amount already paid pursuant to the Notice of Assessment No 1656952346 dated 21 July 2017 in excess of the amount of the further assessment the subject of order (2), plus interest; 4. The defendant pay the plaintiff's costs. 1. I was persuaded to invite additional written submissions about the final form of orders I should make. I made timetabling orders for the filing of those written submissions. Written submissions were made by the parties about the form of the orders in conformity with my reasons. 2. In written submissions filed on 26 April 2021, SPIC agreed with proposed orders (1), (3) and (4). In relation to proposed order (2), SPIC submitted that based on the principal decision, the figure in the order should be $177,292,527 not $201,621,227. SPIC submitted that the figure proposed of $201,621,227 did not take into account the mathematical impact, under Mr Thomas' methodology, of my finding that certain items of expenditure did not represent tenant's fixtures. It will be recalled that Mr Thomas was the expert retained on behalf of SPIC. 3. In arriving at the valuation of $201,621,227 of the interests in land, I adopted the 9.5% discount rate used by the expert retained on behalf of the Commissioner, Mr Ross. SPIC submitted that when the experts prepared their reports, they did not have the benefit of my finding at [109] of the principal decision that: "[109] I have concluded that the WTGs and met masts, together with the infrastructure affixed to the land necessary to send generated electricity to the National Electricity Market, were fixtures at the time of the transaction whereby SPIC purchased the interests in the securities. I find that they were tenant's fixtures. I accept, as SPIC submitted, that development costs, construction-related costs, furniture and fittings, spare parts and those parts of the electronic control system not affixed to land were not fixtures. I also accept that the roads and tracks on the land were fixtures and, if it were necessary to categorise them, should be regarded as landlord's fixtures." 1. The market rent identified in Mr Thomas' model was derived by first adopting a value for the relevant assets the subject of the lease. SPIC submitted that as the items referred to in [109] did not form part of the leasehold interest in land, it followed that the calculation of market rent in Mr Thomas' model must be made in a way that does not include the value of those items. 2. SPIC submitted that the value of the fixtures which were subject to the leases was as follows: Agreed valuation of identified assets at [49] 227,182,500 Less value of assets excluded by findings at [109] Roads and tracks (7,233,500) Development costs (4,050,000) Other construction related costs (14,013,500) Furniture and fittings (8,500) Spare parts (494,000) Value of fixtures subject to leasehold 201,383,000 1. Using the figure of $201,383,000 as the market value of the relevant assets, SPIC submitted that the market rent was $19,332,768 per annum. 2. SPIC submitted that Mr Thomas' methodology then determined the value of the profit rent by deducting the actual annual ground rent ($388,000) from market rent. The profit rent was calculated as $18,944,768 per annum. 3. SPIC submitted that the next step in Mr Thomas' methodology was to calculate the present value of that profit rental at a discount rate of 9.5% [1] for the remaining term of 25.78 years. That calculation was said to produce a figure of $180,202,314. 4. SPIC submitted that the final step in Mr Thomas' methodology was to deduct the deferred remediation liability, in the amount of $2,910,057. That produced an ultimate valuation figure of $177,292,257. 5. In written submissions filed on 30 April 2021, the Commissioner agreed that proposed orders (1) and (3) should be made and submitted that proposed order (2) should be made in the form it had initially been proposed, save that the words "for the leasehold interests in land" replace "of the interests in land". This proposed amendment to order (2) clarifies that the order relates to the value of the leasehold interests only. As explained in the principal decision, duty is chargeable on the unencumbered value of all land holdings and goods: at [67]; Duties Act 1997 (NSW) s 155(1). In addition, the Commissioner points out that the Holdco Land Trust held indirectly two freehold properties, with an agreed combined market value of $750,000: principal decision at [9]-[10]. As SPIC in its reply submissions accepted that such an amendment to proposed order (2) should be made, I will adopt the Commissioner's suggested wording. 6. As to the substance of the amendments proposed to order (2), the Commissioner submitted that the adjustment proposed by SPIC to the Court's concluded valuation figure was not merely mathematical: it strips out some of the going concern value of the wind farm prior to valuing the leasehold interest; is inconsistent with the principal decision and the value ascribed by the Court; is speculative; and is inconsistent with Commissioner of State Revenue (WA) v Placer Dome Inc (2018) 265 CLR 585; [2018] HCA 59 and Federal Commissioner of Taxation v Resource Capital Fund III LP (2014) 225 FCR 290; [2014] FCAFC 37 upon which I relied. 7. Notably, the Commissioner raised no issue about the correctness of SPIC's calculations, about the integers of Mr Thomas' reports affected by the finding I made at [109] upon which SPIC relied, or (if the assumptions made by SPIC were correct) the ultimate arithmetic conclusion that $177,292,527 and not $201,621,227 was the correct amount the subject of order (2). 8. In relation to proposed order (4), the Commissioner submitted that: "Defining 'the event' will depend upon the nature of the litigation: Sze Tu v Lowe (No 2) [2015] NSWCA 91, at [39] per Gleeson JA. Notwithstanding 'that the Assessment was excessive', the defendant submits that, at least on one view, the 'event' has been determined in his favour." 1. The Commissioner characterised the "event" as being whether or not there is any duty liability. The Commissioner submitted that viewing the current tax appeal and consequent tax recovery as part of a whole, the result shows a substantive win for the Commissioner in that he has "preserved a very substantial portion of the tax liability". It was submitted that fairness dictated that there be no order as to costs. 2. In submissions in reply filed on 4 May 2021, SPIC submitted that it had achieved substantial success in the litigation and that order (4) as originally proposed should be made. Consideration 1. I have concluded that SPIC is correct about the amount the subject of order (2). The Commissioner's submissions fail properly to address Mr Thomas' valuation methodology. In deriving the profit rental, Mr Thomas' methodology was based on the difference between the amount actually paid under the leases each year and the cost to rent relevant plant and equipment each year. The difference was what he described as "profit rental". The reason for Mr Thomas undertaking that exercise was to value the leasehold interests in land, on the relevant assumptions that the leases gave the tenant the right to remove the tenant's fixtures during the lease and imposed an obligation to do so at the conclusion of the lease. I accept, as SPIC submitted in reply, that the calculation of the profit rental by Mr Thomas' methodology is necessarily limited to those items which have been found to be tenant's fixtures. 2. It may be that there are methods other than that adopted by Mr Thomas for valuing SPIC's leasehold interests in land which derive a result more favourable to the Commissioner, but in this case the alternative method proposed by the Commissioner was one I rejected as being based on an incorrect legal foundation. As I explained in the principal decision, Mr Ross (who was called by the Commissioner) agreed that Mr Thomas' methodology was an appropriate one if a value of the leasehold interests in land was being determined: see at [181]. As I explained, Mr Ross did not himself perform a valuation based on Mr Thomas' methodology but rather criticised important integers of that calculation. Mr Ross did not criticise the construction of Mr Thomas' profit rental calculation which was, as SPIC submitted, based on deriving a profit rental by first identifying a market rental based on the cost to rent the relevant plant and equipment forming part of the leasehold each year. 3. This is not a situation where the considerable guidance offered by Placer Dome and Resource Capital Fund III LP is of assistance. That is because the integer SPIC points to is one involved in what is actually being valued – the tenant's fixtures which give value to the leasehold interest. In those circumstances, it is correct to adjust Mr Thomas' starting point in his model to address only those items I found to be tenant's fixtures. 4. As to the correct figure to adopt for the purposes of order (2), on the assumption that the suggested methodology was as SPIC suggested, the Commissioner made no challenge to the application of the methodology suggested by SPIC or to the calculation of $177,292,257. I will adopt SPIC's calculation. 5. As to costs, having considered the Commissioner's submissions I remain of the preliminary view expressed in the principal decision. Indeed, given that SPIC has persuaded me that I should adjust downwards by almost $25 million the figures initially proposed as part of order (2), my conclusion is, if anything, firmer. 6. The Commissioner's characterisation of the "event" is not correct. If the "event" in a dispute such as the present was whether or not there was a duty liability, a conclusion that any duty was payable, no matter how small, would result in costs being awarded to the Commissioner. 7. The real question is whether there were separable issues such that a differential award of costs should be made: James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296. As I said in the principal decision, I considered treating the issues as separable such that a set off in relation to costs of the various issues would be appropriate. Although the question of whether the plant and equipment were fixtures was a very important one, the critical question was always whether SPIC had succeeded in demonstrating that the Assessment was excessive such that it should be revoked. Although SPIC failed in a good deal of its attack upon the Assessment, it nevertheless succeeded in a substantial way in demonstrating that the Assessment was excessive. Importantly, the valuer called by SPIC was the only valuer who addressed the correct legal framework. SPIC succeeded in having the Assessment revoked and is entitled to a fresh assessment for a lesser amount based on a land value many millions of dollars less than the value used for the purposes of the Assessment. This is not a case that lends itself to treating the issues as separable such that a set off in relation to costs would be appropriate. Much less do I conclude that the outcome of any such set off would be that there be no order as to costs. SPIC is entitled to its costs. Conclusion and orders 1. For the foregoing reasons and those contained in my principal decision I make the following orders: 1. Pursuant to s 101(1)(a) of the Taxation Administration Act 1996 (NSW), revoke the Duties Notice of Assessment No 1656952346 dated 21 July 2017; 2. Pursuant to s 101(1)(d) of the Taxation Administration Act 1996 (NSW), remit the matter to the defendant for determination in accordance with the Court's reasons, namely that the assessment of duty to the plaintiff is based upon a valuation of $177,292,257 for the leasehold interests in land; 3. The defendant repay the plaintiff any amount already paid pursuant to the Notice of Assessment No 1656952346 dated 21 July 2017 in excess of the amount of the further assessment the subject of order (2), plus interest; 4. The defendant pay the plaintiff's costs. ********** Endnote 1. Being the discount rate I found in the principal judgment should be applied. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 May 2021