Commissioner of Taxation v Resource Capital Fund III
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 842 of 2013)
Judgment date: 3 April 2014
Date published: 16 September 2015

Summary of decision:
Outlines the ATO's response to this case which concerned the application of Division 855 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion (US DTA) regarding Australia's right to tax a foreign resident on profits from the sale of shares in an Australian gold mining company.

Overview of facts:
The taxpayer, Resource Capital Fund III LP (RCF), was a limited partnership formed in the Cayman Islands and was not a resident in Australia. The general partner in RCF was a Cayman Islands resident entity, while the majority of the limited partners were resident in the United States (US). | The taxpayer invested in shares in an Australian company, St Barbara Mines Ltd. (SBM). During the relevant years, SBM owned and operated gold mines in Australia and held extensive mining rights over land in Australia. The taxpayer subsequently disposed of the shares in two tranches. The net capital gain derived by the taxpayer on the two sales was $58,250,000. | For Australian tax purposes, the taxpayer was a 'corporate limited partnership' and was taxed like a company. For US tax purposes, the taxpayer was treated as fiscally transparent such that the limited partners were taken to have derived the income of the limited partnership and were liable to any US tax on that income. | The Commissioner assessed the taxpayer on a net capital gain derived from the sale of shares in SBM on the basis that the capital gain was not disregarded under Division 855 of the ITAA 1997. Division 855 provides that certain capital gains derived by foreign residents are not taxed in Australia. | The taxpayer objected to the assessment and appealed to the Federal Court. | On 26 April 2013, the primary Judge handed down his decision. His Honour found that Article 13(1) of the US DTA only 'authorised' Australia to tax the US resident limited partners in RCF on their respective share of the gain from the sale of the shares in SBM, assuming the gain was not disregarded under Division 855 of the ITAA 1997. Therefore, in accordance with subsection 4(2) of the International Agreements Act 1953 (Cth) (the Agreements Act), the inconsistency between Australia's domestic law and US DTA was to be resolved in favour of the application of the US DTA and the Commissioner was precluded from issuing an assessment to the taxpayer. His Honour also concluded that the capital gain would have been disregarded under Division 855. | The Commissioner appealed the decision at first instance, and on 3 April 2014 the Full Federal Court handed down its judgment which was favourable to the Commissioner. The taxpayer subsequently filed an application for special leave to appeal to the High Court, which was refused. | Issues Decided by the Court | The Full Federal Court considered the following two issues: • whether the Commissioner was precluded by the Agreements Act from issuing an assessment to the taxpayer under Australia's domestic tax law; (Treaty issue); and • whether the capital gain derived by RCF must be disregarded under Division 855 because the value of St Barbara's taxable Australian real property (TARP) assets was less than the value of its other assets with the result that RCF's membership interest in SBM did not pass the 'principal asset test' in section 855-30 of the ITAA 1997 (Valuation issue). | • whether the Commissioner was precluded by the Agreements Act from issuing an assessment to the taxpayer under Australia's domestic tax law; (Treaty issue); and • whether the capital gain derived by RCF must be disregarded under Division 855 because the value of St Barbara's taxable Australian real property (TARP) assets was less than the value of its other assets with the result that RCF's membership interest in SBM did not pass the 'principal asset test' in section 855-30 of the ITAA 1997 (Valuation issue). | First issue | The Full Court found that the taxpayer was neither a resident of the US or Australia and therefore the US DTA did not apply to the taxpayer: [26]. | Accordingly, the Commissioner was not precluded by subsection 4(2) of the Agreements Act from assessing the taxpayer on the profits from the sale of the SBM shares. The Full Court also said at [29] that there was no inconsistency between the domestic law and the US DTA. Rather: | The inconsistency is between US tax law and Australian tax law with respect to the tax treatment of RCF. To put it another way, the inconsistency relates to the imposition of the liability for the tax on the gain, with the consequence that the provisions of the DTA apply differently between Australia as the source country and the US as the place of residence of many of RCF's partners. | The Full Court considered the relevance of the US DTA having regard to the OECD commentary and observed at [30] that: ...Though 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. | Second issue | The Full Court did not agree with the primary judge's conclusion that the principle asset test required that the market value of each asset should be determined as if each asset was the only asset offered for sale and then the sum of the values of TARP assets and sum of the values of non-TARP assets be calculated. Instead the Full Court found that the appropriate hypothesis upon which to value SBM's assets for the purposes of the principle asset test is a simultaneous sale of all of SBM's assets as a bundle to a single purchaser: at [51]. | In reaching that conclusion the Full Court found that the decision of the Full Court of Western Australia in Commissioner of State Taxation (WA) v Nischu Pty Limited (1991) 4 WAR 437 where the value of the mining tenement was determined on a stand-alone basis had no application to the valuation task required by section 855-30 of the ITAA 1997: at [53]. | The Full Court also observed that in the case of a simultaneous sale of SBM's assets as a bundle to a single purchaser, the hypothetical purchaser could expect to acquire the mining information and the plant and equipment for less than their recreation cost with little or no delay: at [54]. | On the basis that the taxpayer's valuation evidence was not premised on correct valuation hypothesis, the Full Court concluded that the taxpayer did not discharge its burden of proof under section 14ZZO of the Taxation Administration Act 1953 that the assessment was excessive.

Issues decided:
The Full Federal Court considered the following two issues: • whether the Commissioner was precluded by the Agreements Act from issuing an assessment to the taxpayer under Australia's domestic tax law; (Treaty issue); and • whether the capital gain derived by RCF must be disregarded under Division 855 because the value of St Barbara's taxable Australian real property (TARP) assets was less than the value of its other assets with the result that RCF's membership interest in SBM did not pass the 'principal asset test' in section 855-30 of the ITAA 1997 (Valuation issue). • whether the Commissioner was precluded by the Agreements Act from issuing an assessment to the taxpayer under Australia's domestic tax law; (Treaty issue); and • whether the capital gain derived by RCF must be disregarded under Division 855 because the value of St Barbara's taxable Australian real property (TARP) assets was less than the value of its other assets with the result that RCF's membership interest in SBM did not pass the 'principal asset test' in section 855-30 of the ITAA 1997 (Valuation issue). | First issue: The Full Court found that the taxpayer was neither a resident of the US or Australia and therefore the US DTA did not apply to the taxpayer: [26]. Accordingly, the Commissioner was not precluded by subsection 4(2) of the Agreements Act from assessing the taxpayer on the profits from the sale of the SBM shares. The Full Court also said at [29] that there was no inconsistency between the domestic law and the US DTA. Rather: The inconsistency is between US tax law and Australian tax law with respect to the tax treatment of RCF. To put it another way, the inconsistency relates to the imposition of the liability for the tax on the gain, with the consequence that the provisions of the DTA apply differently between Australia as the source country and the US as the place of residence of many of RCF's partners. The Full Court considered the relevance of the US DTA having regard to the OECD commentary and observed at [30] that: ...Though 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. | Second issue: The Full Court did not agree with the primary judge's conclusion that the principle asset test required that the market value of each asset should be determined as if each asset was the only asset offered for sale and then the sum of the values of TARP assets and sum of the values of non-TARP assets be calculated. Instead the Full Court found that the appropriate hypothesis upon which to value SBM's assets for the purposes of the principle asset test is a simultaneous sale of all of SBM's assets as a bundle to a single purchaser: at [51]. In reaching that conclusion the Full Court found that the decision of the Full Court of Western Australia in Commissioner of State Taxation (WA) v Nischu Pty Limited (1991) 4 WAR 437 where the value of the mining tenement was determined on a stand-alone basis had no application to the valuation task required by section 855-30 of the ITAA 1997: at [53]. The Full Court also observed that in the case of a simultaneous sale of SBM's assets as a bundle to a single purchaser, the hypothetical purchaser could expect to acquire the mining information and the plant and equipment for less than their recreation cost with little or no delay: at [54]. On the basis that the taxpayer's valuation evidence was not premised on correct valuation hypothesis, the Full Court concluded that the taxpayer did not discharge its burden of proof under section 14ZZO of the Taxation Administration Act 1953 that the assessment was excessive.

ATO view of decision:
First issue | The Full Court decision affirmed the ATO view that Australia was not precluded under subsection 4(2) of the Agreements Act from assessing a limited partnership that is taxed like a company in Australia but treated as fiscally transparent in a treaty partner country. | Whilst the Full Court did not express a view on whether the partners resident in the US could themselves claim the benefit of the US DTA, the Commissioner takes the view that the partners of a limited partnership who are resident in a treaty partner country, are entitled to claim the benefits of the applicable DTA on the basis that it is appropriate for Australia to view the profits derived by the limited partnership as having been derived by the partners. However, in this case, Australia had retained the right to tax the capital gain derived by RCF under Article 13 of the US DTA, so the Treaty did not afford a benefit to the partners which the partners could claim. | The situation would have been different though if Australia had assessed the limited partnership on income to which Article 7 (the Business Profits Article) applied, and the taxing right in respect of that income had been allocated to the treaty partner country under the relevant DTA. In that case, it would have been open for the partners to claim the benefit of the Treaty. The Commissioner's administrative practice on granting a treaty benefit to partners who are resident in a treaty partner country in accordance with the Business Profits Article is explained in paragraphs 34 to 43 in Taxation Determination TD 2011/25. | Second issue | The Full Court also affirmed the ATO view that the correct hypothesis upon which to value an entity's assets for the purposes of section 855-30 of the ITAA 1997 was a simultaneous sale of all of the entity's assets as a bundle to a single purchaser. The consequences that arise from applying the valuation hypothesis adopted by the Full Court was not expressly dealt with by the Full Court.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings & Determinations etc) | The decision does not have any implications for ATO precedential documents. The Full Court referred to TD 2011/25 but noted that it does not address gains dealt with by Article 13, which was the focus of the decision. The Tax Determination deals only with Article 7. | Implications for impacted Law Administration Practice Statements | Not applicable.

Legislative references: Income Tax Assessment Act 1936 94H Income Tax Assessment Act 1997 855-5 855-10 855-15 855-20 855-25 855-30
Case references: Certain Lloyd's Underwriters Subscribing to Contract No IH00AQS v Cross (2012) 248 CLR 378 Commissioner of State Taxation (WA) v Nischu Pty Ltd (1991) 4 WAR 437 Commonwealth Minister for Justice v Adamas (2013) 304 ALR 305 Intoll Management Pty Ltd v Federal Commissioner of Taxation (2012) 208 FCR 115 2012 ATC 20-363 (2012) 91 ATR 518 Leichhardt Municipal Council v Roads and Traffic Authority of New South Wales [2006] NSWCA 353 Spencer v Commonwealth (1907) 5 CLR 418 Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 90 ATC 4717 (1990) 21 ATR 531 Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 233 CLR 259
Subject references: Income tax Non-resident Double Tax Agreement Capital gains Indirect disposal of Australian real properties