YTL Power: The Federal Court Of Australia Clarifies Application Of Certain Statutory Severance Provisions For Tax Purposes

Introduction

On 30 October 2025, the Federal Court of Australia handed down its decision in YTL Power Investments Limited v Commissioner of Taxation of the Commonwealth of Australia [2025] FCA 1317.

The principal issue was whether YTL Power Investments Limited (Taxpayer), a foreign resident company, was entitled to disregard a capital gain of around AUD $948 million resulting from the disposal of its shares in ElectraNet Pty Ltd (ElectraNet). Since 2000, ElectraNet has privately operated the South Australian electricity transmission network under a series of agreements and related statutes under which it 'leases' transmission infrastructure from a South Australian statutory corporation (TLC).

Hespe J held that the capital gain made by the Taxpayer should be disregarded, as the Taxpayer's shares in ElectraNet were not "taxable Australian property" as defined in Item 2 of the table in section 855-15 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). Importantly, the decision reiterates that "real property" in Division 855 takes its general law meaning, such that State-based statutory severance rules can, depending on their drafting and effect, impact whether a particular asset is real property for Division 855 purposes.

The case joins a series of recent decisions of the New South Wales Court of Appeal in a State revenue context (Conexa: our note here and Shell; our note here) which have reached different conclusions regarding whether a taxpayer's interest in significant infrastructure assets is a proprietary interest, based on the specific drafting of the relevant statutory severance regime.

The key takeaways from the YTL decision are as follows:

• While the Court's decision will be welcome to foreign investors in infrastructure assets, it should be emphasised that (as Hespe J herself noted at [196]), the decision largely turned on the particular statutory regime governing the grant of ElectraNet's rights to the underlying infrastructure assets. In other contexts, it remains critical to (1) properly interpret the relevant statutory severance regime; and then (2) test whether the rights conferred on the taxpayer (including those which arise under the regime) meet the general law conception of "real property" or a "lease of land". There is no 'one size fits all' approach to statutory severance provisions and their implications.

• The case is an example of the kind of scenario which the potential changes to Division 855 can be expected to be directed (our note here). Extending the capital gains tax (CGT) regime to assets "with a close economic connection to Australian land and/or natural resources" is expected to capture such electricity infrastructure assets including those subject to statutory severance provisions, with a stated objective of the proposed reforms being to address the inconsistency in the treatment of the same type of underlying assets as either fixtures or chattels based on differences in State law. However, the use of "real property" (rather than "immovable property") in many of Australia's tax treaties – as Hespe J notes at [133] – raises questions about the effectiveness of the proposed changes for residents of countries with which Australia has a tax treaty.

It is also worth noting that stamp duty issues which led to the litigation in Conexa and Shell are unlikely to be an issue here, as the interest sold (33.5%) was below the duty threshold (50%) and South Australia has generally abolished stamp duty on non-residential and non-primary production property.

The Commissioner may yet appeal the decision.

Key Issues and Procedural Matters

The key issue for determination by the Court was whether the Taxpayer was entitled to disregard a capital gain on the sale of ElectraNet shares which was triggered by the entry into an agreement for the sale of the shares dated 8 February 2022.

The issue ultimately turned on whether the Taxpayer's membership interests were "taxable Australian property" as defined in Item 2 of the table in section 855-15 of the ITAA 1997 and specifically, whether the membership interests passed the "principal asset test" in section 855-30 of the ITAA 1997.

This test considers, broadly, whether the market value of the underlying assets of an entity in which the membership interests are held are comprised principally (at least 50%) of "taxable Australian real property" (TARP) within the meaning of section 855-20 of the ITAA 1997, this being:

1. real property situated in Australia (including a lease of land, if the land is situated in Australia); or
2. a mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, petroleum or quarry materials are situated in Australia.

As a procedural matter, the parties agreed to proceed on the basis that:

• three preliminary questions (discussed below) should be determined by the Court in relation to the technical issues about whether the assets were real property or a lease of land for the purposes of Division 855, meaning that the Court has not (yet) needed to consider the complicated valuation issues which will no doubt arise if some of the assets are ultimately found to be real property or leases of land; and

• the Court should consider whether the relevant assets were "real property situated in Australia" on the assumption that, absent the provisions under South Australian law, the rights held by ElectraNet to the relevant assets would have conferred an interest in land which would have been "real property" (narrowing the Court's consideration of the issues to the effect of the relevant South Australian legislation).

The relevant assets in this case were rights over transmission equipment "leased" to ElectraNet (Leased Assets) by TLC under a lease (described as the Network Lease) and related agreements.

The Leased Assets included transmission equipment located on:

• land belonging to third parties;
• land belonging to TLC; and
• land belonging to ElectraNet.

Importantly, section 30 of the Electricity Corporations (Restructuring and Disposal) Act 1999 (SA) (Disposal Act), which governed the privatisation arrangements, contains "severance provisions" which provide:

Electricity infrastructure or public lighting infrastructure the subject of a transfer order, vesting order, sale/lease agreement or special order is to be taken to be transferred, vested or leased (as the case may be) by the order or agreement as if the infrastructure were personal property severed from any land to which it is affixed or annexed and owned separately from the land.

Hespe J undertook careful analysis of the statutory regime and related agreements, holding that the rights, properly characterised, were not TARP within the meaning of section 855-20(a) of the ITAA 1997. Therefore, the membership interests held by the Taxpayer in ElectraNet did not meet the principal asset test and the capital gain made by the Taxpayer could be disregarded. In arriving at her conclusion, Hespe J stated (at [196]) that the decision was a "...function of the particular statutory regime that applied to the privatisation of the South Australian electricity industry (especially s 30 of the Disposal Act) and of the statutory rights conferred on the operator of the transmission infrastructure in respect of third-party land". Put another way, her Honour's decision should not have general application to similar asset classes not subject to the same statutory regime.

As an aside, there was no apparent discussion in her Honour's judgement about the tax residence of the Taxpayer (and whether, for example, the Taxpayer was a tax resident of a jurisdiction with which Australia has a double tax treaty). There was also no reference to whether the buyer under the sale agreement pursuant to which the Taxpayer disposed of the shares in ElectraNet withheld any amount from the purchase price under the foreign resident CGT withholding rules (or whether, for example, the Taxpayer delivered a membership declaration to the buyer to alleviate the withholding obligation).

Decision

Meaning of "real property"

As a preliminary matter, Hespe J first considered the meaning of "real property" as used in Division 855 of the ITAA 1997.

Her Honour rejected (at [120]) the Commissioner's submission that "real property" as used in Division 855 should be understood according to its "ordinary meaning" as something akin to immovable property, and which included "reference to the physical attributes of an item of property and included an item that was a structure that was physically affixed to land" (at [108]).

Rather, her Honour held (at [123]-[136]) that real property has an exclusively technical meaning as a legal term of art. Further, her Honour held (at [133]-[134]) that the intention of the legislature was not to depart from this technical meaning, having regard to the use of the term in ITAA 1997 and in many of Australia's double taxation treaties, as well as the deliberate broadening of the definition in section 855-20(a) to include a lease of land (which would ordinarily be excluded from the technical meaning of "real property"), as observed by the Full Court in Federal Commissioner of Taxation v Resource Capital Fund IV (2019) 266 FCR 1.

Further, her Honour emphasised (at [135]) that "real property" describes an interest or estate, rather than the physical attributes of the underlying property itself:

Contrary to the submissions of the Commissioner, the term "real property" in the context of s 855-20 does not refer to the physical attributes of an item. In context, it refers to the estate or interest of an entity. The phrase "taxable Australian real property" is used in reference to a "CGT asset" and forms part of a test for determining when an entity's underlying value is principally derived from assets that are taxable Australian real property. In that context, the reference to "taxable Australian real property" speaks of the interest which is vested in the entity or in another entity in which the first entity has a membership interest. It is only those interests which can be said to be an asset of the entity.

As such, the question for determination was whether the rights conferred on ElectraNet as lessee of the Leased Assets were "real property" (within the general law conception of that phrase) or a "lease of land".

Application to Leased Assets

Her Honour rejected (at [141]-[150]), the Commissioner's submissions that the Leased Assets were fixtures and therefore part of the underlying land, holding that items affixed to land did not automatically become "fixtures" in the relevant sense. Rather, it was necessary to have regard to the specific rights held by ElectraNet in respect of the Leased Assets (at [148]):

If the rights enjoyed by ElectraNet as lessee of the Leased Assets are to be characterised as "real property" or a "lease of land" it is by reference to the nature of the rights applicable to those assets rather than by recourse to general law principles applicable to tenant's fixtures. 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.

Consistent with the agreed framing of the issues by the parties (described above), her Honour then separately considered whether the rights to the Leased Assets were real property, depending on whether they were located on ElectraNet, TLC or third party land.

Question 1: Leased Assets located on third party land

In respect of Leased Assets located on third party land, Hespe J considered (at [155]-[157]) that the statutory "easement" to access the Leased Assets granted to ElectraNet under the relevant agreements and legislation was not an easement at general law and not real property. When considering the precise bundle of rights granted under the relevant legislation, it was clear that the rights were not "rights of exclusive and unrestricted use" but were instead for a limited statutory purpose. In this way, Hespe J viewed the statutory "easement" as closer to a licence which excuses a trespass; such a licence has always been viewed as non-proprietary.

Under the relevant agreements, where TLC held a private easement over third party land, ElectraNet acquired an equal undivided share in that easement and obtained a lease of TLC's undivided interest. Her Honour noted (at [162]) that at least some of the access arrangements under the private easements possibly conferred an interest in real property, although the terms of the private easements were not before the Court. In any event, the legislation provided that the Leased Assets were not owned by the third party landowner and any rights conferred under the private easements did not contain any rights of access in the nature of real property in respect of the Leased Assets situated on the land.

Her Honour also considered that any rights of access did not give rise to a lease in the third party land, being, rather, "statutory right[s] of occupation for statutory purposes" (at [165]).

Question 2: Leased Assets located on land belonging to TLC

Her Honour held (at [176]-[190]) that, notwithstanding that ElectraNet had separately been granted a lease in respect of land held by TLC containing Leased Assets, the effect of the severance provision in section 30 of the Disposal Act was that:

1. ElectraNet did not obtain rights to use of the transmission infrastructure as an incident of the lease; and
2. the lease to ElectraNet of the Leased Assets did not confer on ElectraNet an interest or estate in the underlying land of TLC. This arose from the terms of section 30 of the Disposal Act, which provided that the relevant assets were personal property.

This second conclusion provides a good contrast to the position in Conexa Sydney Holdings Pty Ltd v Chief Commissioner of State Revenue [2025] NSWCA 20. There, the statutory severance rule remained silent as to the nature of the property interest beyond stating that the property was "owned by the person that constructs or installs it [or a subsequent transferee]". That enabled the Court in Conexa to conclude that the interest which the taxpayer "owned" was an interest in land (on the proper construction of the provision and the rights attaching to the notion of ownership).

The position here is closer to Epic Energy (Pilbara Pipeline) Pty Ltd v Commissioner of State Revenue [2011] WASCA 228, where the relevant provision stated the "[pipelines] do not become part of the land, regardless of whether they are in the nature of a fixture"; that drafting allowed a conclusion that pipelines retained their character as chattels. The express inclusion in section 30 of the Disposal Act that the relevant items were "personal property" meant that it was not necessary to undertake an interpretive exercise of the kind required in Conexa and Epic Energy.

Her Honour rejected the Commissioner's submissions that the broad deeming effect of section 30 of the Disposal Act should be confined, noting (at [187]) that it was "open to the Commonwealth legislature to provide a definition of real property that denied the effect of s 30 of the Disposal Act."

Question 3: Leased Assets located on land owned by ElectraNet

Lastly, in relation to Leased Assets located on land already owned by ElectraNet, her Honour reiterated (at [193]-[194]) that the deeming effect of section 30 operated to treat any rights granted to ElectraNet as personal property severed from the underlying land. That is, despite ElectraNet's ownership of the underlying land, the effect of section 30 was unqualified in that for all purposes, and regardless of who was the actual registered proprietor, the Leased Assets were severed from the land. As such, no additional rights in the nature of real property were granted to ElectraNet.

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