Archive for August, 2012

Windfarms: Making the most of those welcome winds of change

Thursday, August 30th, 2012

More than 600 land owners attended three recent IFA meetings on proposed wind energy projects in the midlands. These could prove lucractive for farmers but there are issues to be considered

A representative from an energy generation company comes into your yard talking about a possible annual rent of €18,000 per wind turbine for three turbines.

You are struggling and cannot wait to get signed up and get going. What are the issues?

Your land will generally be part of a larger block intended to be used as a wind farm.

The company promoting the wind farm needs to have a written commitment from all the landowners in order that the company can make an application for planning permission, and then to make the land available for the wind farm project should planning permission be granted.

Accordingly, you are asked to sign a document called an option agreement.

The option agreement states that for the payment of a fee of up to €1,500 or so, you will give the company the exclusive right to take perhaps a 20- to 30-year lease of a part of your farm if it so chooses at any time within the following period of perhaps five years.

The proposed lease is attached to the option agreement.

The option agreement deals with such things as:

1.The names of the parties;

2.The particulars of the land;

3.The option fee and period;

4.Restrictions on the use of the land (both the land retained as well as that intended to be leased by you during the option period);

5.What tests and surveys can be done by the company;

6.Your willingness to co-operate in planning applications;

7.Felling licence applications etc;

8.Responsibilities of each party;

9.The wind farm company’s contribution towards your professional costs and insurance;

10.You agree not to oppose any planning application by the company and there is no guarantee of a wind turbine.

The proposed lease attached to the option deals with such matters as the names of the parties, the land to be leased, use of that land, the rent, length of lease (generally about 30 years) and the conditions to be complied with by each side.

Such conditions cover a wide range of issues, including sufficient access and accommodation works (e.g. widening entrances, making new passageways, laying cables, construction of substations, storage buildings, masts, fencing).

The farmer can generally graze animals near the turbines and carry on as normal, but cannot do anything to interfere with the operation of the construction or ongoing maintenance of the wind farm or the windflow to the turbines.

The land owner must deal exclusively with that company as regards wind farming and there is often a confidentiality clause. There are clauses relating to dispute resolution and insurance.

So what must the land owner look out for?

Probably the primary matter is only to deal with a company you can trust and which has a track record in wind farm development.

Allied to that is how the project is to be financed and the conditions laid down by the lender.

It would help to be convinced if possible that the overall project has a realistic chance of success.

After that, you need advice from someone with experience in advising farmers in relation to these matters — preferably someone who knows both the wind electricity business and the agriculture business.

Options and leases will be drawn up by the wind farm developer’s solicitors, who may not be aware of all of the regulations with which farmers must comply, particularly in their dealings with the Departments of Agriculture and of the Environment and with their own banks.

Compliance with Single Farm Payment regulations, Disadvantaged Area Payments, REPS, AEOS and Afforestation Schemes can all be affected through the development of a wind farm on a farmer’s lands.

Payments to farmers under these schemes may also be affected.

Developers offer different lease payment systems which may or may not be indexed or linked to actual electricity sales.

Not all wind farm developments are straightforward and where a turbine or turbines must be shared between two or more farmers, a fair method of payment must be agreed between the participating farmers at the beginning to avoid bad feeling between neighbours for the following 20 or more years.

In many wind farm developments, developers will be pressing farmers to sign options and leases quickly.

A wind turbine or turbines on your land should be treated as an alternative enterprise which will improve the income on your farm. You and your neighbours should pool your resources to get the best possible agricultural, accountancy and legal advice to ensure a good return.

A united approach will always achieve better results than if each individual farmer fights his own battle.

Oliver Ryan-Purcell is a solicitor and can be contacted at 086-2532056 or at oliverjryanpurcell@gmail.com, while agricultural consultant David Walsh can be contacted at 086-8338329 or at d_walsh@eircom.net

Before embarking on a wind farm project, be sure to understand the various tax implications

Thursday, August 30th, 2012

By Richard Rea, David Walsh & Oliver Ryan-Purcell

A number of taxation issues arise for landowners on entering into option agreements involving wind farms. These include:

A)Tax on payment under any option agreement;

B)Tax on rent under any lease agreement;

C)VAT on rent under any lease agreement;

D)Capital acquisitions tax (CAT) implications for gifts or inheritances of land leased to a wind farm company.

The option agreement

In the normal case, a landowner is asked to sign an ‘option agreement’, where in return for a payment, the landowner agrees to grant a lease on pre-arranged terms and during a pre-arranged period to a wind farm company, should that company decide to go ahead with the lease.

In addition, under an option agreement, the landowner is giving permission to a wind farm developer to enter on to the lands to carry out the necessary preliminary works, and to enable the developer to establish whether the lands are suitable and capable of establishing a wind farm.

The normal payment to the landowner for such an option would be up to €1,500 per turbine or thereabouts.

Tax aspect of option payment

For tax purposes the granting of such an option by the landowner would be regarded as disposing of a partial right on the lands. This could create a liability to capital gains tax (CGT) as a part disposal of an interest in the lands.

If the landowner is over 55 and meets other requirements, retirement relief under the CGT might apply.

Depending on how an option agreement is worded, the payment on foot of the option agreement might alternatively be regarded by Revenue as compensation for disturbance and thus be liable to income tax over the duration of the option agreement.

The lease

In the event that the wind farm developer exercises the option to take the lease within the period allowed in the option agreement, the lease agreement is then entered into between the landowner and the wind farm developer.

The income to landowners from such lease agreements relating to wind turbines is subject to income tax in the same manner as rental income from any other rental property. The level of income tax arising will depend on the landowner’s existing level of taxable income.

Farming capital allowances or pension payments cannot be set off against rental income. The tax-free exemption for the long-term leasing of farmland does not apply to the lease.

VAT

VAT will not arise on rental income from such lease agreements unless the landowner elects to be ‘vatable’ on that particular rental income. In these circumstances, the VAT rate would be 23pc.

In circumstances where the landowner is already registered for VAT, the VAT will not be payable on the income the landowner receives under the lease unless the landowner elects to be ‘vatable’ on that particular income.

Capital Acquisitions Tax

The major issue that arises on rental agreements involving wind turbines relates to capital acquisitions tax (CAT).

CAT is generally based on the market value of the property acquired.

If 80pc of the gross value of the property belonging to the beneficiary on and after the acquisition can be classified under the legislation as “agricultural property”, agricultural relief may apply.

However, when agricultural land is leased to a wind farm, it then becomes commercial property and cannot be classified as agricultural property for tax purposes.

In circumstances where the rental income from the lease is €15,000 per annum, the market value of the lease could be up to €150,000. Thus, the land leased to the wind farm developer is classified as commercial property and the beneficiary will not qualify for agricultural relief unless he/she complies with the 80pc rule.

Neither will it qualify for business relief under the same CAT legislation.

This is a trap that a landowner could quite easily fall into and, when it comes to transferring to the next generation, the beneficiary of the transfer needs to be aware of it.

Richard Rea is an agricultural consultant based in Co Tipperary. Mr Rea can be contacted at 087-2525302 or at info@reagroup.ie