Tax Topics

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains on income account 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. Pagone J found that the U.S.-resident partners’ share of the partnership gains from selling the shares of Talison Lithium were not exempt 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. In this regard, Art. VI defined real property to include “rights to exploit or to explore for natural resources,” and Art. 13(2)(b) provided:

1. the term “real property”, in the case of Australia, shall have the meaning which it has under the laws in force from time to time in Australia and, without limiting the foregoing, includes:

1. real property referred to in Article 6;
2. shares or comparable interests in a company, the assets of which consist wholly or principally of real property situated in Australia… .

After first finding (at para. 81) that “real property” in Art. 13(2)(b)(ii) also had its extended Art. VI meaning notwithstanding the absence of a reference to Art. VI in that subparagraph. Pagone J went on to find that (based on Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597) that “consists of” language, such as that quoted above “was intended to assimilate as realty only one tier of companies rather than numerous tiers,” so that “the alienation by the partners of RCF IV and RCF V of the shares in Talison Minerals would not come within the terms of Article 13 consistently with the reasoning in Lamesa” (para. 83).

However, Lamesa was overruled by s. 3A(1) of the International Tax Agreements Act 1953 (Cth), which extended the application of the Art. XIII exclusion to dispositions of shares of companies “the value of whose assets is wholly or principally attributable, whether directly, or indirectly through one or more interposed companies or other entities, to … real property or interests”. Thus the Art. XIII exclusion applied to the “disposal of real property indirectly by the partners of RCV IV and RCF V by their disposal of shares” (para. 85).