The Full Federal Court has allowed the Commissioner’s appeal against the decision of Edmonds J in Resource Capital Fund III LP v FCT [2013] FCA 363 which had held that a non-resident limited partnership (RCF) was not assessable on a capital gain of $58m it made on the sale of shares in a Australian company, St Barbara Mines Ltd (“SBM”), that carried out mining operations in Australia.

The Full Federal Court said the primary judge held that RCF was not taxable on the gain because:

  • the provisions of the ITAA 1997 which imposed the liability for the tax on the gain on RCF as the relevant taxable entity were inconsistent with the provisions of the Australia/US Double Tax Agreement (DTA) which treated the gain not as derived by RCF but as derived by the partners of RCF, and that the assessment of RCF was therefore precluded by s 4(2) of the International Tax Agreements Act 1953; and
  • (if it were necessary to decide) RCF’s membership interest in SBM did not pass the “principal interest test” in s 855-30 of the ITAA 1997 because the market values of SBM’s non “taxable Australian real property” (TARP) assets exceeded the market values of SBM’s TARP assets, and therefore the shares were not “taxable Australian property.

The Full Federal Court said it was unable to agree with either of the conclusions of the primary judge. 

  • In its view, the correct analysis on the first issue was that the inconsistency resides in the difference between Australia and the US in the tax treatment of partnerships, not in the terms of the DTA.  Whereas Australia recognises certain limited partnerships as taxable entities, the US treats partnerships as transparent entities and taxes the partners so that the application of the DTA by the Source State (Australia) is different from the application of the DTA by the Residence State (the US), the Court said.  It therefore disagreed that s 4(2) of the International Tax Agreements Act 1953 precluded Australia from taxing RCF on the gain. 
  • As to the second issue, the Court said it disagreed with the primary judge’s construction of s 855-30 and consequently with the valuation hypothesis adopted by the primary judge in determining the market values of SBM’s assets.

The Court directed that within 14 days the parties confer and file and serve agreed minutes of orders, or if in disagreement as to the proper disposition of the appeal in relation to the second issue, written submissions as to their respective positions.

(FCT v Resource Capital Fund III LP [2014] FCAFC 37, Full Federal Court, Middleton, Robertson and Davies JJ, 3 April 2014.)

[LTN 65, 4/4/14]