Resource Capital – Australian Federal Court of Appeal finds that, in determining whether the principal asset of a mining company is resource property, substantial separate value should not be accorded to the (intangible) mining information

A year ago, the Australian Federal Court found that if a sale of shares by a non-resident vendor (RCF) of an Australian gold mining company had not been Treaty-exempt, the company should not be considered to have more than 50% of its assets as Australian real property (i.e., its mining rights), so that the gain also would not have been taxable under the Australian equivalent of the taxable Canadian property rules.

This had rested on a finding that one of the quite valuable non-real estate assets of the company was its "mining information." The logic was that if a purchaser acquired only the mining rights and not the drilling results and mining model, it would have to spend a huge sum on exploration in order to be able to commence production approximately four years later.  Were this logic importable, it would suggest that many Canadian mining company shares may not be taxable Canadian property.

A three-judge panel in the Federal Court has now reversed this decision, stating that it was inappropriate to assume a sale of the mining rights separately from the mining information and that "in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information ... for less than [its] re-creation costs with little or no delay."

RCF was a Caymans LP with US-resident partners, which was treated for Australian purposes as a corporation and for US purposes as fiscally transparent.  The Court (contrary to the primary judge below) found that "because RCF was neither a resident of the US nor a resident of Australia" it followed that the Australia-U.S. Treaty  "does not apply to the gain in the hands of RCF" to limit Australia’s right to tax it.

Neal Armstrong.  Summaries of Commissioner of Taxation v. Resource Capital Fund III LP, [2014] FCAFC 37 (Fed. Ct. of Austr.) under General Concepts – fair market value – other and Treaties – Art 4.