Commissioner of Taxation v AP Energy Investments Ltd
Document type: Decision Impact Statement
Venue: Federal Court of Australia (WAD 367 of 2013)
Judgment date: 25 May 2016
Date published: 7 September 2016

Summary of decision:

Overview of facts:
The taxpayer, AP Energy Investments Pty Ltd (AP Energy), is a non-resident of Australia for taxation purposes. | AP Energy (over the period December 2006 to January 2008) had purchased shares in Abra Mining Limited (Abra) an ASX listed base metals exploration and development company. | On 3 December 2007 AP Energy disposed of a number of the shares it held in Abra making a net capital gain in respect of the disposal. | The Commissioner assessed AP Energy on the capital gain (for the year ended 30 June 2008). The assessment was made on the basis the shares in Abra were an indirect Australian Real Property Interest at the time of the CGT event and therefore the gain was not disregarded under subsection 855-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997). | AP Energy objected to the assessment and appealed to the Administrative Appeals Tribunal (AAT). | In AP Energy Investments Limited and Commissioner of Taxation [2013] AATA 626, the AAT found that Abra did not pass the principal asset test in section 855-30 of the ITAA 1997 at the time of the CGT event and therefore the taxpayer could disregard the capital gain pursuant to subsection 855-10(1) of the ITAA 1997. | The Commissioner appealed the AAT decision to the Federal Court. | Issues Decided by the Court | The primary issue before the Court was whether the value of Abra's taxable Australian real property (TARP) and other (non-TARP) assets, as accepted by the AAT, had been determined in accordance with the valuation hypothesis required by section 855-30 of the ITAA 1997 as set out in paragraphs [51] to [55] of the Commissioner of Taxation v Resource Capital Fund 111 LP [2014] FCAFC 37 (RCF FC). | In particular, the question was whether the AAT, in accepting the taxpayer's 'sunk cost' method of valuation of Abra's mining and exploration information, had adopted a valuation approach that was the same as Edmonds J in Resource Capital Fund 111 LP v Commissioner of Taxation [2013] FCA 363 (RCF) and was therefore inconsistent with the proper construction of section 855-30 of the ITAA 1997. | The Court dismissed the Commissioner's appeal, finding that there was no failing by the AAT in its examination of the evidence and in its reasoning why the valuation approach advocated by the taxpayer's expert was to be preferred over the Commissioner's expert valuation. The Court also found that the AAT decision was not inconsistent with a proper construction of section 855-30 of the ITAA 1997. The Court noted that whilst the Full Federal Court in RCF FC accepted that in a simultaneous sale of SBM's assets the hypothetical purchaser would expect to acquire the mining information for less than it's re-creation cost with little or no delay, it did not go so far as to reject any particular methodology for ascertaining the market value of mining information. It was therefore open to the AAT (on the advice of AP Energy's expert) to accept the sunk cost method of valuation of Abra's mining and exploration information.

Issues decided:
The primary issue before the Court was whether the value of Abra's taxable Australian real property (TARP) and other (non-TARP) assets, as accepted by the AAT, had been determined in accordance with the valuation hypothesis required by section 855-30 of the ITAA 1997 as set out in paragraphs [51] to [55] of the Commissioner of Taxation v Resource Capital Fund 111 LP [2014] FCAFC 37 (RCF FC). In particular, the question was whether the AAT, in accepting the taxpayer's 'sunk cost' method of valuation of Abra's mining and exploration information, had adopted a valuation approach that was the same as Edmonds J in Resource Capital Fund 111 LP v Commissioner of Taxation [2013] FCA 363 (RCF) and was therefore inconsistent with the proper construction of section 855-30 of the ITAA 1997. The Court dismissed the Commissioner's appeal, finding that there was no failing by the AAT in its examination of the evidence and in its reasoning why the valuation approach advocated by the taxpayer's expert was to be preferred over the Commissioner's expert valuation. The Court also found that the AAT decision was not inconsistent with a proper construction of section 855-30 of the ITAA 1997. The Court noted that whilst the Full Federal Court in RCF FC accepted that in a simultaneous sale of SBM's assets the hypothetical purchaser would expect to acquire the mining information for less than it's re-creation cost with little or no delay, it did not go so far as to reject any particular methodology for ascertaining the market value of mining information. It was therefore open to the AAT (on the advice of AP Energy's expert) to accept the sunk cost method of valuation of Abra's mining and exploration information.

ATO view of decision:
The Commissioner considers the decision in this matter to be the consequence of the particular expert valuation evidence adduced before the AAT by the parties. | Therefore, in our view, the valuation approach that was accepted by the AAT in this case should not be taken to be precedent for the valuation of mining and exploration information where the test entity is either an explorer (as the test entity was in this case) or an active miner. | The Commissioner notes the decision of the Full Federal Court in RCF FC provides that the correct hypothesis upon which to value an entity's assets for the purposes of section 855-30 of the ITAA 1997 is a simultaneous sale of all of the entity's assets as a bundle to a single purchaser.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings and Determinations) | Not applicable. | Implications for impacted Law Administration Practice Statements | Not applicable.

Legislative references: Income Tax Asessment Act 1997 Div 855 Administrative Appeals Tribunal Act 1975 44
Case references: AP Energy Investments Limited and Commissioner of Taxation [2013] AATA 626 2013 ATC 10-335 (2013) 97 ATR 639 Commissioner of State Taxation (WA) v Nischu Pty Ltd (1991) 4 WAR 437 Commissioner of Taxation v Dalco (1990) 168 CLR 614 90 ATC 4088 (1990 20 ATR 1370 Commissioner of Taxation v Haritos [2015] HCA TRANS 337 Commissioner of Taxation v Resource Capital Fund III LP (2014) 225 FCR 290 Commissioner of Taxation of the Commonwealth of Australia v Resource Capital Fund III LP (No. 2) [2014] FCAFC 54 2014 ATC 20-451 (2014) 98 ATR 136 Haritos v Commissioner of Taxation (2015) 233 FCR 315 2015 ATC 20-513 Resource Capital Fund III LP v Commissioner of Taxation [2013] FCA 363 2013 ATC 20-386 (2013) 95 ATR 504 Spencer v Commonwealth (1907) 5 CLR 418