Trial judge in error in Cayman Limited Partnership case - Resource Capital Fund III LP
07 Apr 2014
In an appeal by the Commissioner, the Full Federal Court (Middleton, Robertson and Davies JJ) has held that the primary judge (Edmonds J) was in error in deciding each of the issues in Resource Capital Fund III LP v FCT  FCA 363.
The Full Federal Court described the two issues thus:
"In issue in this appeal is whether the primary judge was correct to find the respondent (‘RCF’), a non-resident limited partnership, not taxable on the capital gain that it made on the sale of shares that it held in an Australian mining company, St Barbara Mines Ltd (‘SBM’). The primary judge held that RCF was not taxable on the gain because:
- the provisions of the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act') which imposed the liability for the tax on the gain on RCF as the relevant taxable entity were inconsistent with the provisions of the Double Tax Agreement between Australia and the United States (‘the 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 (Cth) (‘the Agreements Act’)(‘the first issue’); 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 1997 Act 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 second issue’)."
In relation to the first issue, the Full Federal Court held that there was no inconsistency between the provisions of ITAA 1997 and the DTA because the DTA did not apply to RCF - it was not a resident of the US. Accordingly, the DTA did not preclude RCF's liability to Australian tax.
To the extent that there was an inconsistency, the inconsistency was between US tax law and Australian tax law with respect to the tax treatment of RCF. US tax law was relevant because that was the place of residence of many of RCF’s partners. The ability of the US partners to obtain benefits under the DTA was a different question to the question of whether the effect of the provisions of the DTA taxed RCF's gain differently to ITAA 1997.
In relation to the second issue, the primary judge had valued each asset separately to determine the value of RCF's TARP and non-TARP assets. This included RCF's mining information and plant and equipment. The Full Federal Court held that this approach was not correct; rather, "the market values of the individual assets making up that bundle are to be ascertained as if they were offered for sale as a bundle, not as if they were offered for sale on a stand-alone basis".
The Full Court said, at para 54:
"The principles for the determination of market value are not in doubt. The determination requires the application of the Spencer test: that is to consider what a willing not anxious purchaser would have to offer to induce a willing not anxious vendor to sell the asset in question, and, in the present case, on the hypothesis of a simultaneous sale to the one purchaser with the capacity to use those assets in combination in a gold mining operation as their highest and best use. We note that all the experts who gave evidence before the primary judge agreed that in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information and plant and equipment for less than their re-creation costs with little or no delay. How this will bear upon the final calculations for the purposes of s 855-30 will need to be considered by the parties before final orders can be made."
The Full Court indicated that, on this basis, the Commissioner's appeal was likely to be successful, concluding, at para 55:
"On the basis of the submissions made by the parties, it would seem that in light of our reasons, the Commissioner would be successful in the appeal on the second issue. However, as indicated to the parties at the end of oral submissions, the Court will give the parties the opportunity to consider these reasons and to indicate to the Court whether any issue remains to be determined, particularly as to the final calculations."
FCT v Resource Capital Fund III LP  FCAFC 37 (Full Federal Court; Middleton, Robertson and Davies JJ; 3 April 2014).