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07 May 14 Cayman Limited Partnership case: Commissioner succeeds on TARP issue - Resource Capital Fund III LP (No 2)

The Commissioner has succeeded on the remaining issue still in dispute in this case, following the delivery of the primary reasons for judgment by the Full Court of the Federal Court on 3 April 2014 - see 2014 TaxVine No 10 (11 April 2014). The earlier judgment is reported as FCT v Resource Capital Fund III LP [2014] FCAFC 37.

The case concerned the taxation of gains derived from the disposition of shares in a company owning real property (mining tenements) situated in Australia by a limited partnership formed outside both Australia and the United States but comprised of limited partners being predominantly United States residents.

The issue still in dispute was the TARP issue, which concerned whether, on each of two relevant dates (July 2007 and January 2008), the market values of St Barbara Mines Ltd’s (“SBM”) assets which were “taxable Australian real property” exceeded the market values of SBM’s assets that were not: see s 855-30(2) of the Income Tax Assessment Act 1997.

The taxpayer conceded that the Commissioner had succeeded on the TARP issue on the second date, January 2008, but not on the first date, July 2007. The taxpayer contended that it could be concluded on the valuation evidence adduced in court that the principal asset test was not passed as at July 2007. That contention rested on the proposition that it was possible to attribute market values to the mining information and plant and equipment consistently with the Full Court’s earlier judgment – that is, on the basis of an assumed simultaneous sale of SBM’s assets to the same hypothetical purchaser with the capacity to use those assets in combination in a gold mining operation as their highest and best use. The taxpayer contended that since there was evidence of their replacement and scrap values and, it was submitted, as rational negotiating parties would each take half the difference rather than none of it (by failing to agree), a figure could be arrived at by taking the mid-point between the replacement and scrap values of those assets.

The Full Court rejected that approach. The court did not accept as a proper basis for valuation in accordance with the earlier judgment the unsupported and speculative proposition that market value is to be assessed as the mid-point between the replacement and scrap values of those assets.

This meant that the Commissioner had succeeded on the TARP issue on both of the relevant dates. The appeal was allowed.

FCT v Resource Capital Fund III LP (No 2) [2014] FCAFC 54 (Middleton, Robertson and Davies JJ, 2 May 2014).

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