CANBERRA: All foreign investors into Australian companies, especially resources companies, will need to review their approach to Australian tax risks, following a successful appeal by partners of two private equity investment vehicles against income tax assessments of the proceeds of their disposal of investments in an Australian resources company (Resource Capital Fund IV and V LP v Commissioner of Taxation Resource Capital Fund IV LP and Resource Capital Fund V LP were US-based private equity operations established in the Cayman Islands. Investment decisions were made by an Investment Committee meeting in the US, while various management companies conducted the day-to-day operations. In 2007, the Funds, together with other investors, invested in a WA-based mining company known as Talison Lithium and disposed of their interest in a 2013 scheme of arrangement. The ATO issued special assessments to the Funds for their gains on disposal of Talison shares. In coming to its finding for the applicants, the Court dealt with five key issues.
The ATO argued that the Funds themselves were “taxable entities” with standing to the tax appeal.
Though the Funds were tax transparent in both the US and the Caymans, under Australian tax law the Funds had to be taxed as if they were companies. There was also expert evidence that the Funds were not separate legal entities under Caymans law and the proper parties to sue and be sued were the ultimate general partners.
The Court held that the Funds were not separate taxable entities; the correct parties to assess were the partners, not the partnership. However, the Court found that such procedural irregularity could be remedied and determined that the assessments were valid. Nevertheless, the fact that the partners were the correct parties to the action was favourable to other parts of the applicants’ case. The Funds argued that they were protected from Australian tax by the Treaty as the Talison gain was a “business profit” and Talison’s assets were not principally real property situated in Australia. The ATO argued that the Treaty did not apply to the Funds and that, even if it did, Talison’s assets were principally Australian real property. The Court held that the partners of the Funds were entitled to Treaty protection; the relevant “residents” for Treaty purposes were the partners of the Fund and the Treaty did not transform the partnership Funds into “persons” for Treaty purposes. The Funds argued that the Talison gain was not ordinary income as there was no profit-making intention from the outset of the investment and the substance of the transaction and key transaction steps happened offshore.
