Publications / Taxation
Valuation of mining information and specialist plant supports tax free gain
On 26 April, the Federal Court overturned an assessment by the Commissioner of Taxation against a Cayman Islands limited partnership. In respect of a sale for a capital gain of shares in the Australian mining company St Barbara Mines Limited (SBM).
The Federal Court held:
- that Australia could not tax the limited partnership itself due to the Australia US Double Tax Agreement which, at least in the case of US resident partners in a limited partnership provides that any taxation must be of the US partners rather than the Cayman Fund, and
- further the Court held that shares in the mining company were not Taxable Australian Real Property (TARP) and thus not subject to Australian CGT in any case, because the value of SBM’s land and mining tenements was less than the value of its other assets. This was primarily due to a substantial portion of the value being allocated to mining information as well as specialist plant which was fixed to the mining tenement.
The implications were:
- the Court decision means that at least for US based investors, structuring into Australia via a Cayman Island limited partnership can be tax effective
- where the fund is a flow through vehicle for US tax purposes, even if Australian Tax can apply to the gain it would apply at the partner level facilitating a foreign tax credit in the United States
- more generally, the case demonstrated that Australian mining and resource companies will not necessarily be ‘land rich’ or TARP, and thus gains made by non residents on the sale of shares in those companies may not be subject to Australian CGT, and
- the case sets out important principles for the valuation of mining information and specialist plant that may equally apply when determining duty on transactions involving mining assets.
Resources Capital Fund III LP (RCF) was a Cayman Islands Limited Partnership that held 11.95% of the share capital of SBM, an Australian company carrying on a gold mining enterprise in Australia. RCF sold its SBM shares in two tranches deriving a gain of approximately $58 million.
RCF had over 60 partners and more than 97% of its capital was held by US residents, principally funds and institutions. Neither RCF nor any of the partners, were resident in Australia.
Under Australian domestic law, limited partnerships are normally taxed like companies. However for US purposes the limited partnership was taxed as a flow through, ‘fiscally transparent’ entity, so that any US tax liability fell on the partners and not RCF.
Double tax agreement and issues for limited partnerships
While the issues involved are quite complex, Justice Edmonds held that:
- due to specific provisions in the Australia US Treaty which sought to cater for limited partnerships and similar ’fiscally transparent entities’ Australia was only authorised to tax the USA resident partners and not RCF
- this approach however was contrary to Australia’s domestic law which potentially taxed the limited partnership as a company but then would not directly tax the partners on the gain
- the court held that the double tax agreement overrode the domestic law and therefore it was not possible to assess RCF on the gain, and
- as the Australian Commissioner of Taxation (at least in the reported decision) did not seek to tax the US partners on the gain, the court did not consider whether this was possible. While the court clearly found that the treaty would allow this, there remain questions about whether there are sufficient provisions under Australia’s domestic law to allow the Commissioner to directly assess the partners.
Valuation of mining information – gains on shares were not taxable in Australia in any event
Justice Edmonds went on to consider whether Australian tax would apply in any case. This required a determination that the shares in SBM were ‘TARP’ which requires a determination that the underlying land and mining rights of SBM were more valuable than its other assets. The Court:
- found that the shares were not TARP primarily due to the value of mining information and plant, including plant that was affixed to land where SBM held the mining lease (but not the freehold interest in the land)
- provided extensive commentary on the valuation principles used in the four different valuations that were tendered in evidence
- concluded that the maximum value attributed to the mining information would be the cost of recreating the information at current values, adjusted for the impact caused by the delay in a project due to the time required to recreate the information
- also considered that if a person held the information but no other assets it would be of little to no value and therefore they would potentially sell that information for a low value
- found there was a very large range on which arms’ length parties could potentially agree a rational price (being anywhere from nil to the maximum amount of recreating information plus an allowance for the time delay)
- adopted the mid point of the two extremes, in the absence of any reason or ability to objectively determine how a negotiation on value would occur in practice
- adopted a similar analysis of specialist plant and equipment particularly those installed on site. That is, a maximum value was determined being the amount it would cost to rebuild the plant at current values and to then allow an adjustment for delay and disruption to the project in having to notionally rebuild the project. Similarly a minimum value was set being the value of the plant if it was dismantled and sold to a third party
- again adopted the mid point of these two extremes for the purposes of determining the value of the non land assets of SBM
- found in the circumstances, this resulted in the shares in SBM, an Australian gold mining operation not being TARP as the value of the non land components (including the mining information and specialist plant) was more than the value of its land and mining rights, and
- gave a judgment that provides a useful analysis and evaluation methodologies and suggests a preferred method in valuing assets such as mining information and installed plant which potentially has much broader implications including for determining duty payable on mining acquisitions. This part of the judgment will be of interest for those valuing other mining and petroleum companies and assets whether for determining whether a company is a TARP or for determining what duty might be payable on transactions involving mining assets.
Take home messages
The key outcomes of the case are:
- there is an ability to effectively structure investment in Australia by US investment funds via limited partnerships in jurisdictions such as the Cayman Islands
- just because a company is an Australian mining company it should not be assumed that it is ‘land rich’ or Taxable Australian Real Property for CGT purposes meaning that even stakes that are greater than 10% may in certain circumstances be able to be sold tax free by non residents, and
- that similarly there is now some judicial guidance about the allocation of value between mining tenements, mining rights and specialist mining plant in circumstances where the highest and best value of those depends on a single person holding all three assets.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.