Billions of dollars are invested each year into assets constructed on land owned by someone else—whether for renewable energy projects, major infrastructure projects, logistic and transport projects (such as airports and ports) or residential and commercial developments on Australian government-owned land. These projects often involve complex leasing or licensing arrangements. But a critical question is often overlooked: who owns the improvements once they are built?

The answer has serious implications for financing, security, tax and exit transaction planning.

The General Rule: Fixtures Belong to the Landowner

At common law, under the "doctrine of fixtures", any structure or item that is affixed to land becomes a part of the land—and is therefore the property of the landowner. This includes buildings, infrastructure installations and other things that may be fixed to land with an intention that it remain in place for an extended period (or indefinitely).

The High Court in TEC Desert Pty Ltd v Commissioner of State Revenue [2010] HCA 49 confirmed the relevant principles. Putting it most simply:

If you build it on someone else’s land, they own it.

The courts assess whether an improvement is a fixture by looking at:

• The degree of annexation: How securely is the item attached to the land? 
• The purpose of annexation: Was the item intended to remain in place for the long term?

Most buildings and major installations will satisfy these two criteria easily and can be readily identified as fixtures. In contrast, some items of heavy machinery are designed for relatively easy removal and may be installed on a temporary basis. Such machinery may not be a "fixture".

Key Exception: Tenant’s Fixtures

A limited exception exists for “tenant’s fixtures.” This is relevant where a lease includes a clause permitting the tenant to remove certain improvements during the lease term (or shortly after lease expiration).

However:

• Until the tenant removes a relevant fixture, it legally belongs to the landowner.
• The removal right allows the tenant to convert the fixture back into personal property (i.e. a chattel)—but only if the rights to remove are exercised in time.

Practical risk: If the tenant fails to remove the fixture before the deadline, ownership remains with the landlord.

Contractual Agreements: Why They Do Not Always Work

In the context of a particular project, the parties may on occasion agree that someone other than the landowner (such as a tenant, developer or capital participant) “owns” certain improvements. While this agreement may be binding and effective as between those parties, it usually does not bind:

• Tax authorities;
• Secured lenders; or
• Other third parties.

The courts have made it clear that parties cannot “contract out” of reality. In Smeaton Grange Holdings [2017] NSWCA 184 and Hollis v Vabu [2001] HCA 44, the courts rejected attempts to re-characterise legal rights through contractual language or purported disclaimers.

Tax Implications

The tax consequences of developing improvements on someone else's land will typically follow the legal position (i.e. the improvements are fixtures and property of the landowner, subject to any tenant's right of removal). This may be different to the commercial or contractually agreed position as to who "owns" the improvements. This can be relevant for a range of taxes, including income tax (CGT), goods and services tax (GST) and duty. Of course, specific tax rules may be relevant and such issues need to be considered on a case-by-case basis.

Statutory Exceptions

Some legislation does override the common law position. For example, section 64 of the Water Industry Competition Act 2006 (NSW) creates a statutory property right for water pipeline owners in New South Wales. Even when a pipeline is buried under land, the pipeline remains the property of the licensee and can be sold, mortgaged or otherwise dealt with.

Similar statutory exceptions may apply in other regulated sectors (e.g. telecommunications, utilities).

Further, Victoria's property laws provide that a tenant may own certain fixtures which have been installed at the tenant's expense. Refer to section 154A, Property Law Act 1958 (VIC). However, that section may not apply if the lease otherwise provides (or the landlord and tenant otherwise agree).

Again, such issues need to be considered on a case-by-case basis.

Are Improvements Made By a Tenant Non-monetary Consideration for the Grant of a Lease?

If a tenant agrees to undertake certain improvements to land as a condition for the grant of a lease, the provision of those improvements may be treated as nonmonetary consideration for the grant of the lease. Depending on the state or territory in which the land is located, this may trigger a transfer duty liability.

In New South Wales, Revenue NSW has issued a Commissioner's Practice Note, CPN 027, which discusses these issues in detail. It provides worked examples involving a range of common commercial scenarios. As with the other issues discussed above, this is an issue that needs to be considered on a case-by-case basis.

Why It Matters – Key Risks

1. Financing Risk: If the improvement belongs to the landowner, the tenant may have no asset to offer as security.
2. Tax Exposure: For landholder duty and transfer duty purposes, improvements generally increase the dutiable value of land—even if another party paid for them.
3. Exit Planning: A tenant who has funded improvements may lose valuable assets when a lease ends if any rights of removal are not exercised.

What Should You Do?

For developers and tenants:

• Understand that improvements usually belong to the landowner.
• Negotiate removal rights early and clearly.
• Plan for the timing of removal at lease expiry.
• Check whether legislation provides a carve-out for your industry (or for tenant's fixtures in the relevant state or territory more broadly).

For financiers:

• Do not assume a borrower owns certain improvements merely because a commercial document says they do.
• Review security arrangements carefully.
• Consider alternative forms of collateral.

For landowners:

• Consider whether the tenant should be obligated to remove certain fixtures or affixed chattels when a lease term ends.

For all parties:

• Understand the tax implications of the proposed arrangements, including both federal taxes (such as income tax, CGT and GST) and state taxes (such as landholder duty and transfer duty).

Contributing author: Toby Hunt