Division 855 - YTL V Commissioner Of Taxation: Is Infrastructure 'Real Property' (TARP)?

The Federal Court handed down its decision in YTL Power Investments Limited v Commissioner of Taxation [2025] FCA 1317 (Cth) (YTL) on 30 October 2025. In a comprehensive victory for the taxpayer, Hespe J held that certain South Australian electricity infrastructure assets were not 'taxable Australian real property' (TARP) for the purposes of Division 855 of the Income Tax Assessment Act 1997 (Division 855). Instead, the infrastructure was characterised as personal property.

Implications for infrastructure sector foreign investors

The YTL decision provides much needed judicial guidance on how Division 855 is applied for foreign resident investors selling shares or membership interests in entities that operate Australian infrastructure assets. This is a question which has been a matter of significant conjecture for the infrastructure sector. Specifically:

• The Court found that the term real property has its technical meaning based on common law, and not some other ordinary meaning. This distinction has significant ramifications on how a Division 855 analysis is undertaken. For example, under its technical meaning, State-based 'statutory severance' legislation may operate to modify the general principle that structures affixed or annexed to land form part of the land for the purposes of Division 855.
  
• Further, the Court identified whether there was real property by analysing the specific rights held and testing whether those rights have the character of an interest in land.
  
• The Court then found that the electricity transmission infrastructure was separate from any interest in land, with the effect that it constituted personal property.

However, despite the comprehensive nature of the victory for the taxpayer, caution is required when looking to apply the findings more broadly to infrastructure assets:

• The decision indicates that the outcomes may differ depending on the nature of the rights under which infrastructure assets are held by operators. The outcome may also change based on the specific terms of State-based 'statutory severance' legislation that are applicable to the location of the relevant infrastructure assets.
  
• In this regard, the decision in YTL was held to be a function of the particular South Australian privatisation regime and of the statutory rights conferred on the operator of the transmission infrastructure in respect of third party land.
  
• Accordingly, a case-by-case analysis will be required for each infrastructure asset disposition, with the possibility of different outcomes arising based on where the assets are located.
  
• Given the comprehensive victory of the taxpayer in this case, it is likely, in our view, that the Commissioner will appeal the decision.
  
• Taxpayers should also monitor developments on the proposed changes to Division 855, which could affect how Division 855 applies to analogous infrastructure asset dispositionsfor CGT events happening on or after 1 July 2025(see Details revealed for promised foreign resident CGT regime expansion, on potential Division 855 amendments).

Background to the YTL decision

The dispute in YTL concerned whether YTL Power Investments Limited (the Taxpayer),a non-resident of Australia,could disregard a capital gain on its sale of 33.5% of the shares in ElectraNet Pty Ltd (ElectraNet) under Division 855.

Broadly, a foreign resident disregards a capital gain or loss unless the CGT asset is taxable Australian property. One category of taxable Australian property is an 'indirect Australian real property interest'. In YTL, the question was whether the ElectraNet shares were an indirect Australian real property interest.

Broadly, a non-portfolio shareholdingin a company is an indirect Australian real property interest where more than 50% of the market value of all the assets of the company are represented by assets that are 'taxable Australian real property' (TARP).

ElectraNet held certain 'Leased Assets' which consisted of 'electricity infrastructure' in South Australia that was situated on, over, or under land of each of the following categories:

• Land not belonging to neither ElectraNet nor a corporation (TLC) owned by the Treasurer of the State of South Australia;
  
• Land belonging to TLC;
  
• Land belonging to ElectraNet.

The crucial issue in this case concerned whether the Leased Assets (i.e. the electricity infrastructure assets that were situated on the above categories of land in South Australia) constituted TARP for the purposes of Division 855.

This in turn depended on whether the rights conferred on ElectraNet under the different leases in relation to electricity infrastructure assets were TARP for the purposes of Division 855.

Technical meaning vs ordinary meaning of 'real property'

The Commissioner argued that the term 'real property' should be interpreted in accordance with its 'ordinary meaning'. He further argued that the term 'real property' did not bear a single technical meaning. The Commissioner said that the ordinary meaning of 'real property' would mean that the operation of statutory severance provisions would not determine whether the relevant assets were 'real property'. Critical to the Commissioner's submissions was that differences in State-based legislative regimes could lead to different results under federal tax legislation for assets held in different States, despite similar underlying arrangements.

The Commissioner also contended that the concept of land extends to include buildings and other structures on the land, and therefore a lease of a structure that is situated on land is 'necessarily, a lease of land' [113]. The Commissioner also argued thats 30 and Schedule 1 of the Electricity Corporations (Restructuring and Disposal) Act 1999 (SA) (Disposal Act)operated only for limited purposes but 'did not have the effect of denying the electricity infrastructure assets had the character of real property' [115].

Statutory severance legislation

Crucially, the relevant electricity infrastructure was governed by South Australian legislation (s 30 of the Disposal Act) which was described in submissions as 'statutory severance' legislation. Broadly, this 'statutory severance' legislation operates to treat relevant electricity infrastructure "as if the infrastructure were personal property severed from any land to which it is affixed or annexed and owned separately from the land." [181]

The Taxpayer contended that the Leased Assets did not constitute real property situated in Australia broadly on the basis that the South Australian statutory severance legislation was relevant in answering the Division 855 legislative question, and in these circumstances, deemed the relevant electricity infrastructure assets to be personal property (or 'severed' from the relevant land). On this basis, the electricity infrastructure assets were not 'real property' for the purposes of Division 855.

Relevance of the Conexa Sydney Holdings Pty Ltd v Chief Commissioner of State Revenue [2025] NSWCA 20 (Conexa) decision

The Court also considered the relevance of the recent New South Wales Court of Appeal's decision in Conexa on 'statutory severance' provisions. On the Commissioner's view, Conexa confirms that the meaning of 'land' depends on the construction of the particular statute and that a thing affixed to the land would ordinarily be regarded as a fixture and forms part of the land.

However, the taxpayer argued that Conexa was irrelevant to YTL because Conexa did not concern whether the rights in question were real property, or whether the statutory interest in property was a lease of land.

The Court distinguished Conexa on the basis that that decision involved a pipeline which mostly ran under Crown land rather than privately owned land. Further, the statutory severance legislation in Conexa was not equivalent to s 30 of the Disposal Act. It was also said that Conexa did not involve the question of whether there was an interest in 'real property'. Rather, the issue in Conexa was whether there was an 'interest in land'. More significantly, the Court observed that there were other differences in the statutory severance regime in Conexa compared to the statutory severance provisions considered in YTL.

Decision in YTL

Hespe J was critical of the Commissioner's argument that the meaning of 'real property' could adopt anything but its technical meaning, and did not accept the Commissioner's contention. Instead, it was held that 'real property' in Division 855 assumes its technical meaning in law. Specifically, Hespe J said at [148] (emphasis added):

Put another way, the Leased Assets affixed to land the subject of rights held by ElectraNet may have the character of real property if the rights held by ElectraNet have themselves the character of real property.

In relation to the Leased Assets situated on the various categories of land, Hespe J held that for:

1. Land belonging to neither TLC nor ElectraNet: the electricity infrastructure assets situated on third party land were not TARP assets. This was broadly on the basis that those assets were situated on land that was the subject of various types of easements or access rights, and that those easements or access rights did not confer a relevant interest in land.
   
2. Land belong to TLC: although land that was leased to ElectraNet constituted 'taxable Australian real property', the effect of the South Australian 'statutory severance' provisions was that the electricity infrastructure was taken to be leased to ElectraNet 'as if the infrastructure were personal property severed from any land to which it is affixed or annexed and owned separately from the land'. Therefore, ElectraNet did not obtain rights to the use of the relevant electricity infrastructure assets as an incident of the relevant lease of land. Accordingly, the Leased Assets were not TARP, but rather a lease of personal property.
   
3. Land belonging to ElectraNet: the relevant lease did not confer any additional rights in the nature of real property on ElectraNet. This was also on the basis that the statutory severance provisions operated so that the infrastructure was taken to be leased to ElectraNet 'as if the infrastructure were personal property severed from any land to which it is affixed or annexed and owned separately from the land.' Furthermore, ElectraNet did not obtain rights in relation to the Leased Assets by reason of being the landowner, as those assets continued to belong to TLC by reason of the statutory severance provisions. As such, "ElectraNet's rights to use the electricity infrastructure as lessee of the electricity infrastructure did not merge with its rights as landowner." [194]

As for the Commissioner's argument that the legislature could not have contemplated differing outcomes depending on the State in which an asset is located - Hespe J concluded [198] (emphasis added):

It was open to the Commonwealth legislature to displace the effect of that State legislation but the terms of Div 855 of the ITAA 1997 do not do so.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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