RCF IV – Federal Court of Australia finds that gains of U.S. limited partners from sales of an Australian resource company were not Treaty exempt but were not TCP-type gains

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. The gains were held to be on income account given that this investment was handled consistently with the LPs’ modus operandi, which was to “go in, make the investment, improve the performance of the company concerned and then seek to exit within three to six years after that time, having made a profit,” and were derived from an Australian source given inter alia that RCF personnel were active board members. Before finding that the U.S.-resident partners’ share of the partnership gains from selling the shares of Talison Lithium were not exempted under Art. 7 of the Australia-U.S. Convention because of the exclusion in Art. 13 (as expanded in Australian domestic legislation) for dispositions of (deemed) real property situated in Australia, Pagone J found that such gains were from “entreprises of” the U.S. limited partners, stating that this expression encompassed “a passive investment activity.”

The appeals of RCF IV and RCF V (regarded effectively as appeals of their component U.S. partners) nonetheless were allowed on the basis that the shares of Talison Lithium were not taxable Australian real property because their value was attributable more to the “downstream” lithium processing operations than to the “upstream” mining operations.

The same approach might also be applicable to determining whether shares of a Canadian mining company are “taxable Canadian property” (whose definition, unlike the Australian TARP definition and the definition of “Canadian property mutual fund investment” in Part XII.2 of the ITA) uses “derived from” rather than “attributable to” language.

Neal Armstrong. Summaries of Resource Capital Fund IV LP v Commissioner of Taxation [2018] FCA 41 under Treaties – Income Tax Conventions – Art. 3, Art. 13, s. 248(1) – taxable Canadian property – (d), s. 115(1)(a)(ii), s. 9 – capital gain. v. profit – shares, General Concepts – stare decisis, s. 152(1).