In a decision handed down on Fri 26.4.2013, the Federal Court allowed a taxpayer’s appeal and held that default assessments that included as assessable income a $58m capital gain were precluded by the Australia/US DTA.
In July 2007, the taxpayer (RCF) sold 52.5m fully paid ordinary shares in St Barbara Mines Ltd (now called St Barbara Limited) (“SBM”), comprising 5.68% of the capital of SBM which it had acquired in March 2006 as part of a larger parcel of 100m such shares comprising 11.95% of the capital of SBM. On 29 January 2008, RCF sold its remaining shares in SBM.
RCF is a limited partnership formed in the Cayman Islands pursuant to a written partnership agreement dated 17 January 2003. Its general partner is Resource Capital Associates III LP, another limited partnership also formed in the Cayman Islands. Its affairs are managed by RCF Management LLC, a Delaware limited liability company, in Denver, USA. The total gain on the 2 sales was $58,250,000 less transaction costs of $612,109 (the Federal Court said it was not in contest that the Commissioner’s assessment including the capital gain was excessive at least to the extent that those costs were not deducted from the gain assessed).
The Commissioner issued RCF with a s167 “default” assessment for the year of income ended 30 June 2008 which included a net capital gain of $58,250,000 [alleging that these shares were ‘Taxable Australian Real Property’ or ‘TARP’ such that a non-resident would be assessable on the capital gain]. The Commissioner also issued RCF with a notice of assessment of administrative penalty in the sum of id=”mce_marker”3,106,250, being 75% of the tax liability [for intentional disregard of the law].
RCF lodged objections against the Assessment and the Penalty Assessment. The Commissioner allowed in part RCF’s objection against the Penalty Assessment by reducing the administrative penalty from 75% to 25%, being the sum of $4,368,750. On 12 May 2011, RCF’s objection against the Assessment was deemed, by the passage of time, to have been disallowed by operation of s 14ZYA(3) of the TAA.
RCF appealed to the Federal Court against the Commissioner’s deemed objection decision. In a lengthy decision, the Court concluded that the Assessment was precluded by the DTA. Although this was sufficient to allow the taxpayer’s appeal, the Court went on to address the TARP issue. The end result was that the Court set aside the Commissioner’s deemed disallowance of RCF’s objection against the Assessment; and allowed RCF’s objections against the Assessment and the Penalty Assessment in full.
(Resource Capital Fund III LP v FCT [2013] FCA 363, Federal Court, Edmonds J, 26 April 2013.)
[LTN 78, 26/4/13]