Cayman Islands limited partnership not a US resident for treaty purposes - Resource Capital Fund
30 Apr 2013
The Federal Court (Edmonds J) has held, contrary to submissions made by the Commissioner, that Resource Capital Fund III LP ("RCF"), a limited partnership formed in the Cayman Islands, was not a resident of the United States of America ("US") for the purposes of US tax and, accordingly, was not a resident of the US for the purposes of the double taxation agreement between Australia and the US ("the Convention").
It followed that Article 13 of the Convention (the "alienation of property" article) did not authorise Australia to tax a gain derived by RCF in the 2008 income year on the sale of shares in a company ("SBM") that carried on a gold mining enterprise on mining tenements situated in Australia.
In contrast, Edmonds J held that the gain was taxable to the US resident limited partners under the Convention, none of whom were parties to the litigation. His Honour said at paras 76-78 of his judgment:
"...I am of the view that while Art 13(1) of the Convention authorises Australia, by its domestic law, to tax the US resident limited partners in RCF on their respective distributive shares of the gain derived by them on the sale by RCF of the shares in SBM if its requirements are otherwise satisfied, it does not authorise Australia to tax that gain to RCF, the limited partnership, as a non-transparent company.
It follows, in my view, that there is an inconsistency between the application of the Convention and the application of the Assessment Acts as to the entity or entities to be taxed on the gain derived on the sale of the SBM shares. In accordance with the provisions of s 4(2) of the Agreements Act, that inconsistency has to be resolved in favour of the application of the Convention to the limited partners in RCF against the application of the Assessment Acts to RCF, the limited partnership.
I would therefore answer the first issue – yes: the issue of the Assessment to RCF is precluded by the Convention."
Although unnecessary to consider the Commissioner's alternative argument in relation to s 855-10 of ITAA 1997, his Honour went on to hold that the sum of the market values of SBM's taxable Australian real property (TARP) interests did not exceed the sum of the market values of SBM's non-TARP assets at the relevant dates at which shares in SBM were sold. On this basis, the gain was to be disregarded under s 855-10.
RCF's appeal against the Commissioner's deemed objection decision was upheld.
Resource Capital Fund III LP v FCT  FCA 363 (26 April 2013).