Commissioner of Taxation v. Resource Capital Fund III LP, [2014] FCAFC 37 (Fed. Ct. of Austr.)

The appellant ("RCF") was a non-Australian partnership which was assessed on the basis that its gain from the sale of a "member ship interest" in an Australian company ("SBM") with two underground gold mines in Western Australia was from "taxable Australian real property". The SBM membership interest qualified as TARP "if the sum of the market value of [SBM]'s assets that [were] taxable Australian real property exceed[ed] the sum of the market values of its assets that [were] not taxable Australian real property." The primary judge below had found that the SBM membership interests were not TARP, in part, on the basis that the mining information of SBM (a non-TARP asset) had a substantial value in light of the substantial exploration cost that would be required to reproduce this information, as well as the substantial present value of the mining production that would be foregone during the three to five year exploration and evaluation process and that the valuation of the mining rights (a TARP asset) should be discounted by the same factors.

In rejecting this approach on appeal, the Court stated that the market values of the various assets should be made:

on the hypothesis of a simultaneous sale to the one purchaser with the capacity to use those assets in combination in a gold mining operation as their highest and best use. …[A]ll the experts…agreed that in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information and plant and equipment for less than their re-creation costs with little or no delay.

Accordingly, it appeared that the Commissioner was successful, although the parties could make submissions on the final calculations.

The appellant ("RCF") was a non-Australian partnership which was assessed on the basis that its gain from the sale of a "member ship interest" in an Australian company ("SBM") with two underground gold mines in Western Australia was from "taxable Australian real property". The SBM membership interest qualified as TARP "if the sum of the market value of [SBM]'s assets that [were] taxable Australian real property exceed[ed] the sum of the market values of its assets that [were] not taxable Australian real property." The primary judge below had found that the SBM membership interests were not TARP, in part, on the basis that the mining information of SBM (a non-TARP asset) had a substantial value in light of the substantial exploration cost that would be required to reproduce this information, as well as the substantial present value of the mining production that would be foregone during the three to five year exploration and evaluation process and that the valuation of the mining rights (a TARP asset) should be discounted by the same factors.

In rejecting this approach on appeal, the Court stated that the market values of the various assets should be made:

on the hypothesis of a simultaneous sale to the one purchaser with the capacity to use those assets in combination in a gold mining operation as their highest and best use. …[A]ll the experts…agreed that in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information and plant and equipment for less than their re-creation costs with little or no delay.

Accordingly, it appeared that the Commissioner was successful, although the parties could make submissions on the final calculations.

The appellant ("RCF") was a non-Australian partnership which was assessed on the basis that its gain from the sale of a "member ship interest" in an Australian company ("SBM") with two underground gold mines in Western Australia was from "taxable Australian real property". The SBM membership interest qualified as TARP "if the sum of the market value of [SBM]'s assets that [were] taxable Australian real property exceed[ed] the sum of the market values of its assets that [were] not taxable Australian real property." The primary judge below had found that the SBM membership interests were not TARP, in part, on the basis that the mining information of SBM (a non-TARP asset) had a substantial value in light of the substantial exploration cost that would be required to reproduce this information, as well as the substantial present value of the mining production that would be foregone during the three to five year exploration and evaluation process and that the valuation of the mining rights (a TARP asset) should be discounted by the same factors.

In rejecting this approach on appeal, the Court stated that the market values of the various assets should be made:

on the hypothesis of a simultaneous sale to the one purchaser with the capacity to use those assets in combination in a gold mining operation as their highest and best use. …[A]ll the experts…agreed that in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information and plant and equipment for less than their re-creation costs with little or no delay.

Accordingly, it appeared that the Commissioner was successful, although the parties could make submissions on the final calculations.

The appellant ("RCF") was a Caymans limited partnership, with more than 97% of its capital held by a diversified group of US residents, principally funds and institutions. For Australian income tax purposes, it was deemed to be a corporation; whereas for Code purposes, it was a (fiscally transparent) foreign partnership, so that under Code s. 701, any liability for US tax on partnership income was that of its partners (except to the extent they also were fiscally transparent). It was assessed under the Australian equivalent of the Canadian taxable Canadian property rules on its gain from the sale of an Australian company with two underground gold mines in Western Australia.

Article 1 of the Australia-US Convention provided that the Convention applied only to persons (defined to include partnerships) who were residents of one or both of the Contracting States; and Article 4 provided that a person is a US resident if the person is a US corporation "or any other person…resident in the United States for purpose of its tax…." Article 13 provided that gains of a US resident from the disposition of real property situated in Australia (including, in this case, the shares of the Australian company) may be taxed in Australia.

In reversing a finding of Edmonds J that the assessment was invalid as it was an assessment of the partnership (RCF) rather than its US-resident partners, the Court stated (at para. 26):

The primary judge held that RCF was not a resident of the US. It follows from that finding that the DTA does not apply to the gain in the hands of RCF because RCF was neither a resident of the US nor a resident of Australia: see Article 1 of the DTA.

The Court went on to state (at para. 30):

US law attributes to the partners the liability for any tax payable on the gain made by RCF, Australia attributes the liability for any tax payable to RCF. It may be open to argument by the US partners that they should obtain the benefits of the DTA on the basis that it was appropriate for Australia to view the gain as derived by the partners resident in the US, and to apply the provisions of the DTA accordingly, as discussed in the OECD commentary (about which we express no view) but that consideration is a separate issue to the question of whether the effect of the provisions of the DTA was to allocate the liability for the tax on the gain differently to the Assessment Act.