Resource Capital Fund IV L.P. & Anor v Commissioner of Taxation; Resource Capital Fund V L.P. & Anor v Commissioner of Taxation [2019] HCATrans 190 (13 September 2019)

Last Updated: 16 September 2019

[2019] HCATrans 190

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S127 of 2019

B e t w e e n -

RESOURCE CAPITAL FUND IV L.P.

First Applicant

RCA IV GP LLC

Second Applicant

and

COMMISSIONER OF TAXATION

Respondent

Office of the Registry
Sydney No S128 of 2019

B e t w e e n -

RESOURCE CAPITAL FUND V L.P.

First Applicant

RCA V GP LTD

Second Applicant

and

COMMISSIONER OF TAXATION

Respondent

Applications for special leave to appeal

KEANE J
GORDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 13 SEPTEMBER 2019, AT 11.22 AM

Copyright in the High Court of Australia

____________________

MR J.W. DE WIJN, QC: If it please the Court, I appear with my learned friend, MR P.G. BICKFORD, for the applicants in each application. (instructed by Clayton Utz)

MR M. RICHMOND, SC: If the Court pleases, I appear with my learned friends, MR M.J. O’MEARA and MR C.J. PEADON, for the respondent. (instructed by Minter Ellison Lawyers)

KEANE J: Mr De Wijn.

MR DE WIJN: Your Honour, in broad terms, although there were a number of issues raised in the application, they fall into two main categories. The first is the operation of Division 855 which this Court has not yet considered, and in particular in relation to what I might call downstream value adding processes of minerals after they have been mined and extracted from the ground and there is another issue, which I will come to in a moment. The second broad issue is whether the statutory fiction in Division 5A which deems certain partnerships to be treated, for tax purposes, as companies, can effectively sterilise the rights of US resident partners under the business profits article of the DTA.

Your Honours, can I give you some background to these two provisions. Division 855 and the business profits article in each of Australia’s double tax agreements, we say, set an important economic framework in which foreign investors make decisions to invest in Australia. In fact, the stated object of Division 855 is to improve Australia’s status as an attractive place for business and investment.

In general terms, that framework ensures that business profits derived by a foreign resident are not taxed in Australia unless that resident carries on business here through a permanent establishment; that is the general framework. There is, of course, an exception, which comes into play in this case in Article 13, which permits Australia to tax profits made on the alienation of real property, or assets assimilated to real property.

Now, the Commissioner’s case at first instance and on appeal, and we say it was correct, was that it was through Division 855 that Australia sought to give effect to what was permitted under Article 13, that is the way the case was conducted at first instance, and on appeal. It should also be understood that the so‑called capital gains tax provisions in the 1997 Act, although it refers to capital gains, in fact refers to all gains, whether revenue or capital. There is actually no distinction in those provisions dealing with revenue gains or capital gains.

That is dealt with with an anti‑overlap provision in section 118.20, meaning that if you have a revenue gain, you do not pay twice. But in a case like this, where the capital gains tax calculations resulted in a higher figure than the revenue gain, you pay an amount equal to that calculated under the CGT provisions.

GORDON J: Mr De Wijn, on the assumption that all of that background is very helpful, have you not got problems in the application of Division 5A here, to you?

MR DE WIJN: We do not, your Honour, because Division 5A, in fact, we do not need to win on that, because we won on the ruling point. So Division 5A only becomes applicable in relation to the application of the double tax agreement. And the position ‑ and I was going to come to that second but I will just briefly answer your Honour’s question ‑ had it not been for the fact that Division 5A deemed a partnership or treated a limited partnership as a company, the US partners would have been entitled to relief under the double tax agreement, subject to Article 13. The question that arises ‑ and it does not strictly arise at this stage because we are protected by the ruling ‑ but the question of construction of it ‑ ‑ ‑

GORDON J: Under the ruling you are entitled to seek to rely on the double tax agreement, but you could not satisfy it.

MR DE WIJN: Yes, we did satisfy it. We did satisfy it; we won on that point. The only point we lost on was Division 855, and I can turn to that. So we won on the ruling point, and we relied on the ruling, which meant that the only issue in dispute was the 855 point. So can I turn to the 855 point? Division 855 treats gains made by foreign residents as non‑assessable, or the term used is “disregarded”, unless it involves a direct or indirect interest in Australian real property, and in the case of a sale by shares, it is 50 per cent or more.

Real property includes the term “mining, quarrying or prospecting right”. So the term “mining, quarrying or prospecting right” arises in the context of a provision which assimilates these rights to real property. And that is not surprising, because the minerals in the ground belong to the Crown until they are mined.

Now, at first instance and on appeal, the Commissioner expressly stated that he did not contend that the general purpose lease, which we are principally concerned with, and on which the processes or the factories that produced the technical grade concentrate and the chemical grade concentrate, the Commissioner expressly contended that they were not within paragraph (a) of the definition of “mining, quarrying and prospecting right”, and your Honours will find that – I will come to that in a minute.

The Commissioner contended only that the general purpose lease came within paragraph (d) so there was not a contention that the general purpose lease was a right to mine. The case proceeded before his Honour Justice Pagone, and the evidence was called on that basis.

Now, the Full Court then came to the conclusion that the general purpose lease was a right to mine. We won on the paragraph (d) point. So contrary to how the case was run at first instance, and on appeal, the Full Court concluded that the general purpose lease was a right to mine falling ‑ ‑ ‑

GORDON J: Were the general purpose leases before the court?

MR DE WIJN: The register was before the court.

GORDON J: No, the leases themselves?

MR DE WIJN: Your Honour, all of the documents that were provided to the court was the register certified by the Minister, which has the authority under the Act, and sets out all of the conditions of the lease. This lease is a statutory lease; in the rights given were the rights under the general lease were the right to process the ore, to concentrate the ore; that was in court.

GORDON J: The only reason I ask is I think it is at paragraph 128 and following on this aspect, which really goes to the question of whether this is an appropriate vehicle. It is described by the Full Court as spartan.

MR DE WIJN: Well, your Honour, with respect, it was not spartan because the Full Court had before it the register – this Act operated by way of a statutory register. The leases were statutory leases, there was a statutory pro forma for each lease, and the basis on which ‑ or what was permitted under the lease needed to be set out, and that was set out in the register that was before the court. All of the conditions that applied to the lease were set out in the register, a certified copy of which was produced to the court and which has statutory effect. There was nothing left for the piece of paper, because the piece of paper took a statutory form.

KEANE J: At paragraph 139, page 48 of the reasons, page 173 in the book, their Honours in the plurality in the Full Court say:

For the reasons that follow, we are unable to determine definitively whether the mining leases conferred only the limited rights contended for by the respondents.

MR DE WIJN: Your Honour, the mining leases covered a different area to the general purpose lease. What the mining leases has provided for ‑ ‑ ‑

KEANE J: They went on to say:

Having said that, we infer, on balance, that the First General Purpose Lease probably conferred the rights to process lithium ore into lithium concentrate.

MR DE WIJN: Exactly.

KEANE J: Does your case involve a challenge to that conclusion about what the general purpose lease conferred?

MR DE WIJN: No, no, we accept that. The general purpose lease, there were mining leases which permitted the extraction of the ore and there was a separate lease over a separate area of land, adjacent to the mining leases, obviously, which covered the processing and the concentration of the ore. We accept that, that was clear from the evidence. And so all of the ‑ ‑ ‑

KEANE J: Can I ask, does it appear – does the basis on which royalty was payable appear?

MR DE WIJN: I do not think it does. State royalty?

KEANE J: Yes.

MR DE WIJN: I do not think it does. I do not think it does, it was not any ‑ ‑ ‑

KEANE J: Then one will be tempted to infer that it is payable on the lithium concentrates.

MR DE WIJN: I am not sure about that, but I do not know, but that is a State matter. So we accept ‑ ‑ ‑

KEANE J: Yes, but it goes to the question of what is recovered by this process.

MR DE WIJN: With respect, that is not the question, your Honour. The question is whether the general purpose lease was an authority or a permit to mine minerals; that is the question.

KEANE J: Is not the question, what is the mineral?

MR DE WIJN: Precisely. The issue here was that the general purpose lease did not permit the extraction of the minerals from the ground. The general purpose lease permitted the concentration and the production of what the Full Court described as two man‑made products. So we say, what the Full Court did in concluding that the general purpose lease was a right to mine under paragraph (a), something that had not been contended, was an impermissible use of cases which construed the phrase “mining operations” in an entirely different statutory context.

Those statutory contexts involve specific industry concessions or incentives – section 122 of the Income Tax Assessment Act, which provided a write‑off for certain expenditure in connection with mining operations, which are described in the cases as being “broader than mining,” and “pertaining to mining.” The other cases were diesel fuel rebate cases, where there were express definitions in the term “mining operations”, which included beneficiation.

So the error, we say, on this point – and we say it is a fundamental error of statutory construction – is that the court took some cases which construed the phrase “mining operations” in an entirely different context, but it took the phrase “mining operations”, and substituted that for the phrase “a permit to mine for minerals”. That is the error, as a matter of construction, and that is an error of statutory construction, we say.

Now, on the footing that we ask the right question, and on the footing that my learned friend ran the case on, that paragraph (a) did not apply to the general purpose lease, what our valuers had to do was value the mining leases separate from what was permitted under the production leases or the processing leases.

GORDON J: Do you accept that you are not right on the statutory construction contention then the valuation issues, in effect, fall away?

MR DE WIJN: Yes, your Honour.

GORDON J: Do you accept that even if you are right on the statutory construction question you are really left with just – understand what is the question of principle on those valuations ‑ ‑ ‑

MR DE WIJN: Well, the question of principle is the question of statutory construction. You take one phrase ‑ ‑ ‑

GORDON J: No, no, the valuation issues.

MR DE WIJN: Sorry, the valuation issue. If we are right in the task, then we are right in the valuation issue. I explained what the valuers did and Justice ‑ ‑ ‑

GORDON J: I think we understand. The argument is about the method of calculation, and the assumptions upon which that calculation was taken, but that is not a question of principle, is it?

MR DE WIJN: Well, we won that point before Justice Pagone on the evidence. It was decided against us in the Full Court because the Full Court said the general purpose lease is a right to mine. If that is right, we lose that point. But on the basis that we are right in treating the general purpose lease as not giving rise to a right to mine, what the valuers had to do, obviously, was value the mining leases separate from the production leases. They did that by working out a value of the product immediately before the processing started.

They used a conventional methodology, the netback methodology. And then what they did – that gave you a value of the product at the end of the mining process, immediately before the processing ‑ that gave you a value for the product then. Mr Prendergast then took that value over the life of the mine and worked out a discounted cashflow of that. That is entirely conventional.

Now, if we are wrong on the question, then obviously the valuation falls away. If we are right on the question, then you have got to work out a value for the product at the end of what we call the mining operation and the beginning of the processing operation.

So we say that what the valuers did depended on the task they were asked to do. My learned friend’s valuers were asked to value all of the mining tenements together; they were never asked to differentiate. So there was only one valuation before Justice Pagone, which sought to value the mining leases, as opposed to what I might call the production leases. So we say that once you have asked the right question, the valuation approach is uncontroversial.

Your Honours, the second Division 855 mistake is what the valuers referred to as the VBML issue, “value beyond mining lease”, which is a curious term. But it arose because the life of mine model upon which the sale of shares had been based, or the price of the shares had been based, extended beyond the second 21 years of the mining leases. Under the Mining Act, leases apply for 21 years. You have got a statutory right to a second lease, but after the expiration of the second lease you no longer have a statutory right and the issue of a further lease is at the discretion of the Minister.

The issue is a simple one and we say it is an important issue. The issue is a simple one: does that expectation the Minister will give you a new lease or extend the term of the previous lease ‑ I think it is probably a new lease, but it does not really matter ‑ is that expectation part of the lease that is about to expire? We say the answer to that is easy, it is clearly not.

KEANE J: Well, is that not inconsistent with the assumption your own experts worked on? They assumed that they were dealing with the life of the mine?

MR DE WIJN: They did but those experts did not – that was for the purpose of determining the value of the shares but this is a different exercise. The exercise for Division 855 is to look at that overall enterprise value and then divide it up and to work out which parts of that overall enterprise value would ‑ ‑ ‑

KEANE J: How realistic is it to assume that someone other than the current owner of the tenement is going to have the right to exploit the tenement for the life of the mine?

MR DE WIJN: Well, can I give your Honour a simple example. Assuming we have got an ordinary tenant of commercial premises whose lease is about to expire, and he has been there for 10 or 20 years paying his rent, and got a good business. One would not assume that the value of his lease is other than nominal towards the end of the lease, notwithstanding that he has an expectation that the landlord will grant him a new lease or an extension of the old lease.

We accept, your Honour, that there would be an expectation that a new mining lease would be granted, and the Minister would grant it, but the question for these purposes ‑ and Division 855 is a technical set of provisions which seeks to assimilate certain rights to real property ‑ and we say the question is simply not, “Was there an expectation?” Clearly there was because someone added it into the value of the shares that were purchased, but the question is, “Is that expectation real property, or deemed to be part of ‑ ‑ ‑

KEANE J: Is it not that, what does the market expect? How does that expectation affect the market, in terms of the value it will place on the property?

MR DE WIJN: But what the market placed a value on was the shares. No doubt there was an expectation, just as in my example, that the landlord would grant a new lease, but that does not mean that you add value to that lease because it is only the lease that goes into the TARP issue. So that is the question. It is a technical set of provisions. But the question is whether that expectation that the Minister will grant a new lease forms part of the value of the lease that is just about to expire.

I need to say something about the deemed entity point and Division 5A because, as I said to your Honour Justice Gordon a moment ago, strictly speaking we do not need to win that point because we won on the ruling point. We won on the ruling point, and we were allowed to rely on the ruling. So the only issue ‑ if we win on either of the two Division 855 points, we win, unless there is a contention and we go backwards. But at the moment, the way things are, if we win on either of the two 855 points, we win, because of the effect of the ruling and in a sense the Division 5A point is academic.

It is an important point because as we read the joint judgment, particularly at paragraphs 25 and at 34, at application book 131 and 135, the Full Court accepted that the corporate limited partnership is not a separate juridical person capable of being sued in its own right, or capable of suing. It treats the limited partnership, which is treated as if it is a company for tax purposes, as a statutory fiction.

Your Honours, that is our point. It is not a real person. We read Division 5A as treating the limited partnership as if it were a company. It does not make it a company, and it only treats it as a company for the purpose of calculating the liability to tax. If I could take your Honours to section 94V, which is at application book 133. We say this section makes it clear ‑ it is at about line 22:

The application of the income tax law to the partnership as if the partnership were a company is subject to the following changes:

(a) obligations that would be imposed on the partnership are imposed instead on each partner –

And then (b) makes it clear that liability to pay is joint and several.

GORDON J: So it deals with two issues, imposition and liability to pay – two very separate concepts. That is what is put against you and that is how, as I understand it, the way in which the Full Court dealt with it.

MR DE WIJN: It is.

GORDON J: It is pretty important.

MR DE WIJN: Well, it is important, but you cannot impose tax upon a non‑existent statutory fiction. What this makes clear, we say, is that the “as if”, just as in Tikva, shows you how you go about the assessing and calculating the tax that is payable. But the obligations, it does not say this fictional entity is liable to tax; nowhere says that. It says the obligations that would be imposed on the partnership, that fictional entity, are imposed instead on each partner.

Now, certainly making partners jointly and severally liable, or shareholders jointly and severally liable for the liability of a company or a partnership, does not equate it to a company. That is not the way it operates. Your Honours, it is in this way that we raise the constitutional argument because we raise the constitutional argument effectively as a construction point, and if we are right in treating the limited partnership as a fictional entity, for the purposes of the calculation “as if”, which was the issue in Tikva that the High Court considered – sorry, I will withdraw that.

If the limited partnership is treated as a separate entity, then making the taxpayers liable to pay the tax would be unconstitutional. Now, that is what MacCormick’s Case was all about. MacCormick’s Case was a case, as your Honours will recall, where shareholders of companies were made liable, pursuant to a specific Act, for unpaid tax liabilities of the company and there was a constitutional challenge to that.

The High Court, when one reads the decision of the High Court, it is clear that the legislation would have been unconstitutional if the shareholders did not have a right to object to an assessment. The legislation was held to be constitutional, because the process under the Taxation (Unpaid Company Tax) Assessment Act was for a separate assessment to be imposed or issued to the shareholders and for there to be objection rights.

GORDON J: Do you accept that if the Full Court is right that this imposition on the partners is an assessment – is a collection question and not an assessment question, then this issue does not arise?

MR DE WIJN: No, we are not, because the whole point – that is exactly what they were trying to do in MacCormick.

GORDON J: Because here you have got the ability not only to assess the partnership but for it to object ‑ ‑ ‑

MR DE WIJN: Yes, you have got the ‑ ‑ ‑

GORDON J: ‑ ‑ ‑ and the rights are given the objection.

MR DE WIJN: Exactly, but this is on the basis – we accept that this legislation is valid if you treat the partnership as an association of the partners but once you treat the partnership as a separate legal entity, not as if, but as a separate legal entity, you are in different territory because then you have an assessment to one person and you are making someone else liable for the tax without a right of objection.

Now, what is really important in this case is what the Commissioner then does, and the Full Court, with respect, then does with this separate legal entity, or this statutory fiction, because this statutory fiction is then imported into the double tax agreement and used to effectively sterilise the US partners’ relief under the double tax agreement. Now, it is abundantly clear that were it not for this deeming of the ‑ ‑ ‑

KEANE J: Will not the partners have their own rights to object?

MR DE WIJN: They say no. That is our point, because no assessment has been served on them.

KEANE J: And when it is, they would have their right to object.

MR DE WIJN: But it is not, because there is not a separate legal entity. The Commissioner is not going to issue an assessment to the partners. The Commissioner has issued an assessment to the association of persons constituted by the partnership, and we did object to that. The question is simply, is that a separate legal entity, or is it an objection by the association of partners? We say it is the latter.

Now, once you treat the partnership as not being a separate juridical entity, then the clear interpretation of the double tax agreement is that we get the relief. The slide, with respect, that has been adopted, is that the relief under the double tax agreement has been denied, effectively denied, because the tax has been paid by – it is not a separate lot of tax to be paid by the partners.

The tax has been paid by the partnership. The partnership has objected. We say that is an objection by the association of persons, just like an ordinary partnership. But the Commissioner then says, and the Full Court says, you cannot get the relief under the article because you have got this fictional entity there. Now, the answer to that is, we say, pretty straightforward. The unchallenged evidence ‑ ‑ ‑

GORDON J: That is, you accept, consistent with the earlier decision of the Full Court?

MR DE WIJN: The earlier decision of the Full Court did not consider this, with respect. RCF III simply did not consider this. The earlier decision of RCF, this point was never argued. And the earlier decision in RCF III assumed that the partnership was an entity and they were clearly caught by Division 855, and there was a different argument, namely, the argument that for some reason, by operation of the double tax agreement, Article 855 did not apply. It was a completely different argument, with respect, your Honour.

I need to remind your Honours that in this case there was detailed evidence, expert evidence, from US lawyers – and if it matters, Cayman Islands lawyers – that these partnerships are not treated as separate legal entities for tax or legal purposes in the US or in the Cayman Islands. So the position is that but for the statutory fiction created by Division 5A, and the Full Court refers to it as a statutory fiction, the partners in the US would have been entitled to the relief.

Now, nothing has actually changed to the enterprise or to the profits, and the business profit article exempts, in the appropriate circumstances, particular business profits from an enterprise, from an activity. The activity remains the same. The actual owners of the business remain the same. All that is happening is through this deemed fictional entity is that that relief is effectively being denied.

GORDON J: So do you challenge the findings at 76 and 77 and the reasoning at page 150 which deals with the fact that there was no evidence that either of the general partners was a resident of the US for the purposes of the DTA and then the following at 77?

MR DE WIJN: About the tax liability. There was direct evidence from US experts that the income from these partnerships was included in the assessable income of the partners. Now, it obviously was not included in the assessable income of the partnership because the partnership did not exist for US tax law.

KEANE J: Do you accept what is said at paragraph 75? That:

Each partner, who was a resident in the United States, had and has the legal capacity to invoke the DTA in recovery proceedings or in collateral recovery proceedings –

MR DE WIJN: With respect, no, it is a fanciful argument, your Honour. The tax was assessed and paid by the partnership. The partnership, we say, as an association of persons, did object. Did not have to defend recovery proceedings because the tax was paid by them – we say by them, by the partners. What the partners did then, in the name of the partnership, was to bring on the objection. What is put against us now is that it was not the partners that brought about the objection, it was some deemed entity, some fictional entity.

So, your Honours, it is really fanciful to say the partners can come along and claim the money. There is an assessment, which is prima facie proof of the assessment, and there is simply no practical way or even legal way in which we could do that. The way they do it is the way that the Act contemplates, that is, by objecting to the assessment. If your Honours please.

KEANE J: We do not need to trouble you, Mr Richmond.

These applications are not suitable vehicles for the resolution of any question of principle in relation to Division 855 of the Income Tax Assessment Act 1997 (Cth). Otherwise there is no reason to doubt the correctness of the decision of the Full Court of the Federal Court. The applications will be dismissed with costs.

AT 11.56 AM THE MATTERS WERE CONCLUDED