THE FEDERAL COURT OF AUSTRALIA
NSD 277 of 2014
RESOURCE CAPITAL FUND V LP
COMMISSIONER OF TAXATION
DATE OF ORDER:
THE COURT ORDERS THAT:
2. The proceedings be listed for hearing on Friday, 16 February 2018 in Sydney.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
1 These proceedings raise for consideration the proper tax treatment of profits made by Resource Capital Fund IV LP (“RCF IV”) and Resource Capital Fund V LP (“RCF V”), from the sale of their shares and interests in Talison Lithium Limited (“Talison Lithium”), an Australian company, in March 2013. Proceeding NSD 276 of 2014 challenges the correctness of an assessment issued by the Commissioner on 25 March 2013 to RCF IV which was sent on that day with a covering letter addressed to the General Partner of that partnership. Proceeding NSD 277 of 2014 concerns an assessment issued by the Commissioner on 25 March 2013 to RCF V which was sent on that day with a covering letter addressed to the General Partner of that partnership. Objections in both cases were lodged in the name of the partnerships and each of the proceedings was commenced in the name of the partnerships rather than in the name of any of the partners. Leave was subsequently given, however, for the General Partner of each of the partnerships to be joined as parties to the proceedings. The applicants submitted that the proper parties to the proceeding were the partners of the partnerships rather than the partnerships, which the applicants submitted did not exist as legal entities. The Commissioner maintained, in contrast, that the proper applicants in the proceedings were the partnerships as taxable entities but did not oppose the joinder of the General Partners to the proceedings to permit the General Partners to seek the relief sought in the proceedings, namely, that the objections should be allowed and the assessments set aside.
2 The formal joinder of the General Partner to each of the proceedings related to a fundamental issue between the parties about the operation of the relief afforded by the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (“the United States Convention”). The Commissioner’s assessments were made under Division 5A of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”) which by s 94A provided for certain limited partnerships to be treated as companies for tax purposes. The Commissioner maintained that the provisions of Division 5A contemplated that certain limited partnerships, including RCF IV and RCF V, were to be treated as taxable entities and were able to be assessed to tax in that capacity. The Commissioner had previously assessed Resource Capital Fund III LP (“RCF III”) as a taxable entity, and RCF III had objected to the assessments but had unsuccessfully sought to obtain relief under the United States Convention: see Federal Commissioner of Taxation v Resource Capital Fund III LP (2014) 225 FCR 290 (“RCF III”). The partnership constituting the RCF III partnership had objected to the assessments, and had maintained proceedings as if RCF III were a taxpayer under Part IVC of the Taxation Administration Act 1953 (Cth) (“the Administration Act”). It was contended for the partners of the RCF IV and RCF V partnerships, however, that the RCF III proceedings had been conducted upon the erroneous basis that RCF III was a legal entity able to be taxed as a separate taxable entity. The Commissioner submitted, in contrast, that the assessments had properly been issued to RCF IV and RCF V as taxable entities and that the decision in RCF III had conclusively determined as a matter of law that the partnerships were taxable entities. It becomes necessary to consider, therefore, the provisions of Division 5A of the 1936 Act and whether the decision of the Full Court in RCF III decided that a limited partnership within Division 5A was a taxable entity able to be assessed as such.
3 A partnership is not a separate legal person in law distinct from the individuals who comprise it, but is, rather, an association of legal persons carrying on a business in common with a view of profit: K.L. Fletcher, The Law of Partnership in Australia (Law Book Company, 9th edition, 2007), p 3 [1.05]. In Rose v Federal Commissioner of Taxation (1951) 84 CLR 118, the High Court rejected the proposition which had been put by the Commissioner in that case that the 1936 Act required a partnership to be considered as a separate legal entity separately from the individuals who composed it. At 124 the Court said in a joint judgment:
The commissioner’s case must therefore depend on making good the proposition that for the purpose of s. 36 a partnership is to be considered a separate entity distinct from the individuals who compose it, so that when the taxpayer vested what was his as an entirety in himself and his two sons as partners having co-ownership, he is to be considered for the purposes of s. 36 as having “disposed of” the property as an entirety in the assets to a distinct legal entity. A partnership is not a distinct legal entity according to English law. In Scots law a firm is a legal person distinct from the partners of whom it is composed. But in our law it is far otherwise with partnerships. “The members of these do not form a collective whole, distinct from the individuals composing it; nor are they collectively endowed with any capacity of acquiring rights or incurring obligations”: Lindley on Partnership, 11th ed. (1950), vol. 1, ch. 1, s. 4. If, therefore, a partnership is to be treated for the purpose of s. 36 as a distinct legal entity, it must be because of an assumption which the Income Tax Assessment Act requires, not because of the general law. But an examination of that Act discloses no ground for construing it as requiring that such an assumption should be made. By s. 6 the word “partnership” is defined to mean an association of persons carrying on business as partners or in the receipt of income jointly but not to include a company. Division 5 of Part III, which deals with partnerships, is based upon the view that the collective income earned by the partnership belongs according to their shares to the partners regardless of its liberation from the funds of the partnership, that is, its actual distribution. There appears to be no foundation for importing into s. 36 a conception of a partnership varying from that adopted by the general law.
In Commissioner of Taxation v Beville  ALR 490 Taylor J at 492-3 also rejected a submission that proceeded from the Commissioner’s argument that a partnership should be regarded as “an entity distinct from the partners themselves” for the purposes of the 1936 Act.
4 The ordinary provisions applicable to the taxation of partnerships are found in Division 5 of the 1936 Act. Division 5 in general terms treats a partnership “as if” it were a taxpayer, but does so only for the purpose of calculating the amounts to be included in the individual returns of the partners. Section 91 obliges a partnership to furnish a return of the income of the partnership but expressly provides that the partnership is not liable to pay tax thereon. The liability, if any, to pay tax falls upon the individual partners who are obliged to include in their individual returns their share of partnership profits and who may claim in their individual returns their share of any partnership loss. Section 92 is concerned with the income to be included, and the deductions that may be allowed, by a partner by reference to the individual interest of the partner in the net income of the partnership or of the partnership loss. Section 90 contains definitions of “exempt income”, “net income”, “non-assessable non-exempt income” and “partnership loss” in relation to a partnership on the basis that each be calculated “as if” the partnership were a taxpayer who was a resident in Australia. In Tikva Investments Pty Ltd v Federal Commissioner of Taxation (1972) 128 CLR 158 Stephen J explained at 168, by reference to the decisions in Rose and Beville, that when s 90 referred to the assessable income of a partnership being calculated “as if the partnership were a taxpayer” it was doing so “for the purpose of calculation of assessable income, but for that purpose only, a new taxpayer [was] brought into existence”. His Honour went on to observe that for “all other relevant purposes” it was “with the individual members” of the partnership that the Act was concerned.
5 The decision in RCF III proceeded, however, from a basis that was different from that which had been considered in Rose, Beville and Tikva. Rose had been referred to in the submissions of the parties in RCF III, but Tikva was not referred to, and neither party had contended in those proceedings that the assessment in RCF III could only have been issued to the partners rather than to the partnership. The arguments in RCF III had, rather, proceeded from the assumption that Division 5A had created a limited partnership as a new category of taxable entity which was able to be taxed separately from the partners. The Full Court referred therefore, without argument to the contrary, at  to RCF III as “an independent taxable entity in Australia and liable to tax on Australian sourced income”, and at  to RCF III as “a separate taxable entity taxed as a company”, without that issue having been in dispute in the proceeding. The issue had not been in dispute in RCF III because in that case the contention of the applicant had been that it was the partnership as a taxable entity which was entitled to the relief afforded by the United States Convention. The Commissioner’s contrary contention had been that RCF III as a taxable entity was not entitled to the relief which was afforded by the United States Convention to the partners and, therefore, in those proceedings the parties had joined issue on whether the partnership as a taxable entity was entitled to the treaty relief, and no submission was put by either party that RCF III was not a taxable entity. An application to the High Court for special leave to appeal was rejected on the basis that the decision of the Full Court was not attended by sufficient doubt to warrant the grant of special leave, but neither party contended in the application for special leave that the partnership had not been properly assessed as a taxable entity. The decision of the Full Court was described by Crennan J in dismissing the application for special leave as a finding by the Full Court that the limited partnership was not entitled to the benefits of the United States Convention. In dismissing the application for special leave to appeal her Honour described a limited partnership, as had been the case of both parties in RCF III, as “an independent taxable entity in Australia and liable to tax on Australian sourced income”, but her Honour was not affirming a finding by that description of a contested fact.
6 The applicants in these proceedings contended, therefore, that the decision in RCF III did not determine that the partnerships were taxable entities separate from the partners and maintained that the decision in RCF III did not prevent the partners from claiming the relief afforded to the partners under the United States Convention. The doctrine of precedent does not permit this Court to disregard a binding decision of an appellate court. In Proctor v Jetway Aviation Pty Ltd  1 NSWLR 166 Moffitt P said at 177:
The obligation of every court loyally to follow decisions of any court superior to it has been often stated. At times it may appear to a judge or to an appeal court that the reasoning or absence of it in a binding decision renders that decision unsatisfactory. However, the law concerning precedent, based as it is on the need for certainty in the law, absolutely binds him to follow the precedent. He is as much bound by the law of precedent and the law so pronounced as he is by any other law. The law provides its own rules to admit of flexibility. These rules, which are part of the binding law of precedent, permit departure from prior erroneous decisions, but only in prescribed circumstances. The law binding on all does not include any right of a court to depart from a decision of a superior court and hence one binding upon it upon some basis, such as that some matter is considered to have been overlooked by the superior court or for some other reason it appears to be wrong. It does not permit it to disregard a binding decision of an appellate court on some view based on the reasoning of judges in a decision of an ultimate appellate court which does not overrule the binding decision. An example of this is provided by the reasons of some members of the High Court in Stage Club Ltd v Millers Hotel Pty Ltd which certainly did not overrule McGee or even deal with the same question.
The obligation to follow a decision on a question considered by an appellate court does not arise, however, where the court has assumed a proposition of law to be correct without addressing its mind to it even where the decision on a point of law in a particular sense was essential to the earlier decision. In Re Hetherington (deceased)  Ch 1 Browne-Wilkinson VC considered whether he was bound by a decision made by the House of Lords on a question which had been considered by the House of Lords that was applicable also to the case before him. At 9-10 his Lordship said:
However, the fact remains that the House of Lords did decide that a trust for Masses was a valid trust and that under the law as we know it now to be such trusts cannot be valid unless (a) they were not illegal under the Chantries Act and (b) they were either charitable trusts or trusts of the anomalous class. The question therefore is whether I am bound by the decision made by the House of Lords to hold that in the present case the claim of the next of kin must fail.
In my judgment, I am not so bound. In Baker v. The Queen  A.C. 774, Lord Diplock, after mentioning that the Judicial Committee of the Privy Council does not normally allow parties to raise for the first time on appeal a point of law not argued in the court below, said, at p. 788:
“A consequence of this practice is that in its opinions delivered on an appeal the Board may have assumed, without itself deciding, that a proposition of law which was not disputed by the parties in the court from which the appeal is brought is correct. The proposition of law so assumed to be correct may be incorporated, whether expressly or by implication, in the ratio decidendi of the particular appeal; but because it does not bear the authority of an opinion reached by the Board itself it does not create a precedent for use in the decision of other cases.”
That decision was applied in Barrs v. Bethell  Ch. 294, where after quoting the passage I have read from Lord Diplock, Warner J. continued, at p. 308:
“In my judgment, the principle that, where a court assumes a proposition of law to be correct without addressing its mind to it, the decision of that court is not binding authority for that proposition, applies generally. It is not confined to decisions of the Judicial Committee of the Privy Council.”
That approach coincides with some words of May L.J. in the recent Court of Appeal case of Ashville Investments Ltd. v. Elmer Contractors Ltd.  Q.B. 488, 494, where he said:
“In my opinion the doctrine of precedent only involves this: that when a case has been decided in a court it is only the legal principle or principles upon which that court has so decided that binds courts of concurrent or lower jurisdictions and require them to follow and adopt them when they are relevant to the decision in later cases before those courts. The ratio decidendi of a prior case, the reason why it was decided as it was, is in my view only to be understood in this somewhat limited sense.”
In my judgment the authorities therefore clearly establish that even where a decision of a point of law in a particular sense was essential to an earlier decision of a superior court, but that superior court merely assumed the correctness of the law on a particular issue, a judge in a later case is not bound to hold that the law is decided in that sense. So therefore, in my judgment, Bourne v. Keane  A.C. 815 is not decisive of the case before me.
That passage was cited with approval in the majority joint judgment of the High Court in CSR Ltd v Eddy (2005) 226 CLR 1 at 11,  in which their Honours said:
These events placed the Court of Appeal in a difficult position. It is of course commonplace for the courts to apply received principles without argument: the doctrine of stare decisis in one of its essential functions avoids constant re-litigation of legal questions. But where a proposition of law is incorporated into the reasoning of a particular court, that proposition, even if it forms part of the ratio decidendi, is not binding on later courts if the particular court merely assumed its correctness without argument. “[T]he presidents, … sub silentio without argument, are of no moment.”
It is important to the issues in this proceeding that at no stage had it been contended by either party in the RCF III proceedings that Division 5A did not constitute or contemplate RCF III to be a limited partnership able to be taxed as a taxable entity separately from the partners. The Commissioner in RCF III, as in the present proceedings, had assessed the limited partnership as a separate taxable entity but neither party in RCF III had argued that Division 5A either did or did not create limited partnerships as taxable entities. It was, rather, assumed by both parties in RCF III that Division 5A permitted limited partnerships to be treated as separate taxable entities. Counsel for the applicant in RCF III had contended, not that the limited partnership could not be treated as a separate taxable entity, but, rather, that the partnership as a taxable entity was entitled to the Convention relief otherwise available to the partners of the partnership. The decision in Rose was unsuccessfully referred to in that context by counsel for the applicant in support of the proposition that the partners’ entitlements under the Convention must necessarily be available to the limited partnership.
7 The view that a limited partnership might be a legal entity may also have been assumed in other proceedings in this court involving RCF IV and RCF V. RCF IV and RCF V commenced proceedings in 2013 against the Commissioner in relation to notices which had been issued by the Commissioner under s 255 of the 1936 Act, but there was no issue raised in those proceedings about whether either of the partnerships was a taxable entity: see Resource Capital Fund IV L.P. v Commissioner of Taxation (2013) 95 ATR 638; Federal Commissioner of Taxation v Resource Capital Fund IV L.P. (2013) 215 FCR 1. Rule 9.41 of the Federal Court Rules 2011 (Cth), however, permits persons claiming as partners to start a proceeding in the partnership name and, to that extent, it may not have been necessary in those proceedings to consider whether RCF IV and RCF V were suing as separate taxable entities or were the partnership names in which the partners had started their proceedings.
8 It follows from those observations, and from the way in which the issue of RCF III as a taxable entity was considered in RCF III, that the view in RCF III that the partnership in that case was a taxable entity is not binding in these proceedings. It is true that the Full Court in RCF III referred to the limited partnership in that case as being a taxable entity but the correctness of that proposition was assumed without argument. The Commissioner had assessed the limited partnership as if it were a taxpayer able to be assessed separately from the partners and the applicant in RCF III had not contested that, but had sought to maintain, rather, that the relief available to the partners under the United States Convention was available also to the limited partnership. It was no part of the case of either party at any stage in those proceedings that the limited partnership was not a taxable entity able to be assessed as the Commissioner had done. The rejection of the application for special leave to appeal by the High Court was upon the same basis and assumption which had been made by the parties and which had been adopted by this Court. Furthermore, “reasons for refusing special leave to appeal in a civil proceeding are not themselves binding authority”: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 134, ; see also 133 at . In those circumstances the question is not foreclosed from consideration in these proceedings.
9 It becomes necessary in these proceedings to consider, therefore, whether RCF IV and RCF V are taxable entities by reason of Division 5A of the 1936 Act as was submitted by the Commissioner. The object of the Division is described by s 94A as being “to provide for certain limited partnerships to be treated as companies for tax purposes”. This provision does not purport to create a new category of legal person or purport to deem certain limited partnerships to be companies, but, rather, identifies the objective of making provision for “certain limited partnerships” to be treated for tax purposes in the same way as companies are treated for tax purposes. The “certain limited partnerships” which fall within the operation of Division 5A are all a sub-category of “limited partnerships” as defined by s 995-1 of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”). That is because subdivision B in Division 5A identifies when a limited partnership is a corporate limited partnership which is to be taxed as a company by the modifications effected by subdivision C. But a corporate limited partnership affected by these provisions must first be a “limited partnership” within the meaning of s 995-1. That section provides that a limited partnership means:
(a) an association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited; or
(b) an association of persons (other than one referred to in paragraph (a)) with legal personality separate from those persons that was formed solely for the purpose of becoming a VCLP, and ESVCLP, and AFOF or a VCMP and to carry on activities that are carried on by a body of that kind.
Clause (b) of the definition of “limited partnership” does not apply to RCF IV or RCF V because neither was formed solely for the purpose of becoming one of the entities mentioned in (b), and clause (a) of the definition of “limited partnership” expressly contemplates an association of persons. The section does not, in other words, purport to create a new category of legal persons but assumes that legal persons associating in the way contemplated by the definition may fall within the definition of “limited partnership” as employed in Division 5A. Section 94C is, unsurprisingly, consistent with the conception of a limited partnership being an association by dealing with the change in the composition of a limited partnership and by providing that such a change will not affect the continuity of the partnership.
10 The way in which Division 5A required the relevant limited partnerships to be treated as companies for tax purposes requires consideration of the provisions in subdivision C of Division 5A. Section 94H provides that the “income tax law” has effect in relation to a corporate limited partnership subject to the provisions which come after s 94H. For this purpose “income tax law” is defined in s 94B to mean:
(a) this Act [which is defined in s 6(1) of the 1936 Act to include the 1997 Act] (other than this Division and Division 830 of the Income Tax Assessment Act 1997); and
(b) an Act that imposes any tax payable under this Act; and
(c) the Income Tax Rates Act 1986; and
(d) the Taxation Administration Act 1953, so far as it relates to an Act covered by paragraph (a), (b) or (c); and
(e) any other Act, so far as it relates to an Act covered by paragraph (a), (b), (c) or (d); and
(f) regulations under an Act covered by any of the preceding paragraphs.
The provisions which come after s 94H set out changes to the way in which income tax law has effect in relation to a partnership which is a corporate limited partnership in relation to a year of income. None of the provisions expressly create a new legal person or expressly provide for there to be a new taxable entity. All of the provisions in Division 5A are consistent with those which had been considered in Tikva that treated a partnership “as if” it were a separate entity for the purpose of calculation only and not for the purpose of separate assessment or, relevantly, for an additional hurdle that might disentitle the partners to any relief that they might have under a provision of a treaty.
11 Both parties drew attention to different aspects of s 94U to make competing submissions about whether Division 5A created taxable entities. Section 94U is headed “incorporation” and provides:
For the purposes of the income tax law, the partnership is taken to have been incorporated:
(a) in the place where it was formed; and
(b) under a law in force in that place.
The applicants drew attention to the words “is taken” in this provision and emphasised the deeming effect of the section, whilst the Commissioner focused upon both those words with those which followed, namely “to have been incorporated”, to submit that they indicated an intention to create a taxable entity.
12 Section 94U is primarily directed to the need to make provision to modify the income tax laws to enable a partnership to be treated as a company because a partnership is neither a company nor any other legal person. Section 94U does not make partnerships taxable legal entities but, rather, is a provision identifying the way in which the tax law is, and must be, modified for partnerships to be treated as if they were a company. That is achieved in particular by deeming a place of incorporation and by deeming that incorporation to have been under a law in force in that place. The deeming, in other words, is of a notional place of incorporation, and of a notional law in force in that place of notional incorporation, as facts which are to be assumed because the assumptions are needed to enable the statutory fiction of treating limited partnerships as if they were companies to operate effectively. The provision does not in form, effect or purpose create a taxable entity, and its legislative function is in part similar to that found in the definitions in s 90, for the purpose of Division 5, of requiring that the calculation of the income of the partnership be as if the partnership were a taxpayer who was a resident. In that case the deeming is of a residency and in the case of s 94U the deeming is of its analogue, namely, of a place of incorporation.
13 The modification effected by s 94V is of particular significance in this context because it expressly limits (or undoes) some of the other modifications to the income tax law brought about by Division 5A. Section 94V provides:
94V Obligations and offences
(1) 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, but may be discharged by any of the partners;
(b) the partners are jointly and severally liable to pay any amount that would be payable by the partnership;
(c) any offence against the income tax law that would otherwise be committed by the partnership is taken to have been committed by each of the partners.
(2) In a prosecution of a person for an offence that the person is taken to have committed because of paragraph (1)(c), it is a defence if the person proves that the person:
(a) did not aid, abet, counsel or procure the relevant act or omission; and
(b) was not in any way knowingly concerned in, or party to, the relevant act or omission (whether directly or indirectly and whether by any act or omission of the person).
It is significant that the changes effected by s 94V are of the way in which the income tax law was to apply to the partnership when treated as a company. The section changes, in other words, the way in which the other provisions were otherwise to apply to a partnership when those other provisions would have applied to a partnership as if the partnership were a company. Amongst those changes is that the obligations that would be imposed on the partnership “are imposed instead on each partner” and that each partner is jointly and severally liable to pay any amount that would otherwise be payable by the partnership. The need for such changes to what might otherwise obtain, arises from the possibility that requiring that the income tax law be applied to the partnership “as if” the partnership were a company might otherwise have resulted in the partnership, rather than the partners, becoming liable for obligations, or becoming liable to pay any amount, that “would be” of the partnership. The section deals with the obligations and liabilities imposed or arising in relation to the application of the income tax law (as defined). Those obligations and liabilities necessarily include the obligation and liability to pay tax by an assessment. The enactment of s 94V thus tells against the Commissioner’s argument that Division 5A was intended to permit assessments to be raised to the partnership rather than to the partners, and, if it is not a complete answer to the Commissioner’s argument, it is, at very least, a strong pointer in that direction. Nothing in s 94V, or in any other provision in Division 5A, authorises the Commissioner to impose any obligation or liability upon any person other than a partner, and if there had been any doubt where the liability and obligation fell, the doubt was expressly removed by s 94V.
14 The conclusion that the corporate limited partnerships are not created as separate taxable entities is thus required by the text of the provisions, but it is also required by consideration of the purpose of the provisions. The context and purpose of a provision are important to its construction. In Federal Commissioner of Taxation v Unit Trend Services Pty Ltd (2013) 250 CLR 523 it was said in a joint judgment at :
As French CJ, Hayne, Crennan, Bell and Gageler JJ said in Federal Commissioner of Taxation v Consolidated Media Holdings Ltd: “This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text.” Context and purpose are also important. In Certain Lloyd’s Underwriters v Cross French CJ and Hayne J said:
“The context and purpose of a provision are important to its proper construction because, as the plurality said in Project Blue Sky Inc v Australian Broadcasting Authority, ‘[t]he primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute’ … That is, statutory construction requires deciding what is the legal meaning of the relevant provision ‘by reference to the language of the instrument viewed as a whole’, and ‘the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed’.” (emphasis of French CJ and Hayne J)
Section 15AA of the Acts Interpretation Act 1901 (Cth) requires the interpretation of an Act that will best serve the purpose or object of the Act, whether or not that purpose or object is expressly stated in the Act. The object and purpose served by s 94V is to ensure that the partners carry the burden brought about by the application of the income tax law to the partnership as if the partnership were a company. The partnership is treated as a company for the purposes of determining how the income tax law is to apply, but the factual and legal reality remains that the partnership is not a company and that any obligations and liabilities must fall upon the individual partners. The context and purpose of s 94V is to ensure that the partners are those who bear the obligations and liability arising from treating the partnership as a company for fiscal purposes.
15 That construction is also consistent with what had been said in relation to Division 5 in Rose, Beville and Tikva, of which the legislature must be assumed to have been aware when enacting the provisions of Division 5A. The construction is consistent also with the conclusion of Gzell J in Deputy Commissioner of Taxation v McGuire (2013) 275 FLR 153 in relation to the liability of a limited partnership constituted pursuant to the Partnership Act 1892 (NSW) to pay GST. His Honour observed at  that the legislation had provided that the limited partnership was liable to pay to the Commissioner the running balance account deficit debt and the general interest charge, but that the limited partnership “was not a legal entity”. The provisions which were considered by his Honour, which had some similarity to s 94V of the 1936 Act, made the partners liable to pay the tax liabilities notwithstanding that their liability to contribute to the liabilities of the partnership was as between them limited to $5.
16 It is not necessary for the purpose of construing these provisions to have recourse to the explanatory memorandum relating to the introduction of Division 5A, but it is sufficient to note that the explanatory memorandum supports the construction submitted by the applicants. Chapter 4 of the explanatory memorandum accompanying the Bill enacting Division 5A was concerned with the taxation of limited partnerships as companies. The then proposed s 94A was explained in Explanatory Memorandum, Taxation Laws Amendment Bill (No. 6) 1992 at 30 as follows:
The bill will amend the Principal Act to introduce taxation arrangements in new Division 5A Part III of the Act for taxing limited partnerships [clause 8].
The object of this new Division is to ensure that limited partnerships will be treated as companies for taxation purposes. This is not confined to the payment of income tax by limited partnerships, but includes all other purposes under income tax law, including the payment of tax by partners in limited partnerships; for instance, imputation and the taxation of dividends to shareholders [new section 94A].
It is clear from this explanation of the proposed objects provision, that Division 5A was intended to treat a limited partnership as a company but not that there was an intention to create a new taxable entity. The explanatory memorandum went on to consider the nature of a limited partnership under the heading “What is a limited partnership?”. In that context the explanatory memorandum referred to the definition then found in the provision proposed as s 94B and made clear that a limited partnership was “any partnership” in which the liability of at least one partner was limited. The scope of the Division, in other words, was to apply broadly and was not limited to new taxable entities. The explanatory memorandum next considered the partnerships that qualified as “corporate limited partnerships”, under the heading “Which limited partnerships are affected?”, by reference to partnerships, and made no suggestion of new taxable entities being established by the then proposed law.
17 The explanation in the explanatory memorandum at 39 of the provision proposed to deal with incorporation is instructive by explaining that the rule to deem a place and law of incorporation for a corporate limited partnership which was proposed in s 94U was needed “to clarify the operation of several provisions relating to companies, as they apply to corporate limited partnerships”. The explanatory memorandum went on to deal with the obligations and offences of limited partnerships proposed in s 94V(1) as follows:
Obligations and offences of limited partnerships
Broadly, obligations and offences of limited partnerships are taken to be those of the individual partners, with certain joint and several liabilities. The reason for this approach is that, while corporate limited partnerships are generally treated as companies for the purposes of the income tax law, this does not convert them into companies for other purposes, including criminal law, monetary claims, and so on. So the obligations and offences of limited partnerships continue to be dealt with broadly as before these amendments. The law will provide for limited partnerships in much the same way as for other partnerships.
Where, as an entity, a corporate limited partnership is subject to an obligation under the income tax law, that obligation is imposed on each of the partners, but it may be discharged by any of them [new paragraph 94V(1)(a)].
Where, as an entity, any amount is payable under the income tax law by a corporate limited partnership, the partners are jointly and severally liable to pay that amount [new paragraph 94V(1)(b)];
Where, as an entity, any offence against the income tax law would have been committed by a corporate limited partnership, each partner will be deemed to have committed the offence [new paragraph 94V(1)(c)].
These passages reveal that a purpose of the legislation was to provide for corporate limited partnerships to be treated as corporations under the income tax law upon the assumption that corporate limited partnerships were not converted into companies for other purposes. The explanatory memorandum specifically noted, as was subsequently clearly provided, that an obligation under the income tax law of a corporate limited partnership was an obligation “imposed on each of the partners”. The explanatory memorandum specifically noted, as was also subsequently clearly provided, that “any amount” that was made payable under the income tax law by a corporate limited partnership was the joint and several liability of the parties and was to be paid by them. There was no suggestion anywhere in the explanatory memorandum of any concept of “taxable entity” or of corporate limited partnerships, or of certain limited partnerships, being created as taxable entities separate from the partners.
18 The conclusion that RCF IV and RCF V are not taxable entities makes it necessary to consider who has been assessed and who is before the Court. The Commissioner has power to assess a “taxpayer”: see 1936 Act, ss 166, 166A, 167, 168, 169, 169AA, 169A, 170. Section 175A of the 1936 Act entitles a “taxpayer” who is dissatisfied with an assessment “made in relation to the taxpayer” to object against it in the manner set out in Part IVC of the Administration Act. A person dissatisfied with an objection decision made by the Commissioner may appeal to this Court against the decision pursuant to s 14ZZ(1) of the Administration Act. A “taxpayer” had formerly been defined by s 6(1) of the 1936 Act to mean “a person deriving income or deriving profits or gains of a capital nature”. The obligation to pay tax under the 1997 Act is now determined by the expression “you”, which applies to entities generally. Section 4-10 of the 1997 Act provides that “you” must pay income tax worked out by reference to your taxable income.
19 The assessments were not in form addressed to the individual partners of RCF IV and RCF V. The assessment in respect of RCF IV was addressed as follows:
Resource Capital Fund IV LP
Maples Corporate Services Ltd
Ugland House South Church Street
PO Box 308
The assessment in respect of RCF IV was sent by the Commissioner under cover of a letter dated 25 March 2013 addressed to the General Partner of RCF IV as follows:
The General Partner
Resource Capital Fund IV LP
Maples Corporate Services Ltd
Ugland House South Church Street
PO Box 308
The Commissioner’s letter described the subject matter of the letter as “Resource Capital Fund IV LP (Tax File Number 940 862 980) Assessment regarding disposal of taxable Australian property” and referred throughout to the intended recipient as “you” and informed the recipient described as “you” of having obligations to pay tax and of having rights of objection and appeal. An assessment in similar form, under cover of a letter similarly addressed, was sent by the Commissioner in respect of RCF V. The objections in each case were on forms approved by the Commissioner and identified the taxpayer in each case by reference to the name of the partnership and the applicable tax file number of the partnership. The form was accompanied by a document headed “Notice of objection against assessment” giving the name of the taxpayer as the partnership. The two proceedings in this Court were commenced in the name of the partnerships, rather than in the individual names of the partners, although, as mentioned, leave was given at a directions hearing for the General Partner in each proceeding to be added as an applicant, although, arguably, that might not have been necessary if the applications were made by the partners in their partnership name as contemplated by r 9.41 of the Federal Court Rules 2011 (Cth).
20 The applicants submitted at the hearing that the assessments, although in form addressed to limited partnerships, were to be read as addressed to the partners and that the covering letters addressed to the General Partner were to be read as addressed to the General Partner on behalf of the partners. The applicants, therefore, did not challenge the validity of the assessments because of the form in which they had been addressed, and the Commissioner did not challenge the competency of the proceeding in this court nor, of course, concede that the assessments were invalid if they were to be taken to be addressed to the limited partners of the relevant partnerships.
21 In Federal Commissioner of Taxation v Prestige Motors Pty Ltd (1994) 181 CLR 1 the High Court held that it was essential to the validity of a notice of assessment that it state the name of the taxpayer who is liable to pay the tax, and that a notice addressed to a nominated trust purporting to state the tax payable was prima facie to be understood as directed to the trustee in whom the trust assets were vested. In that case an assessment had described the taxpayer as “Prestige Toyota Trust” rather than as the trustee who was liable to pay the tax assessed. The High Court in a joint judgment, however, rejected the taxpayer’s argument that the notice of assessment was required to state the name of the taxpayer as part of the particulars of the assessment saying at 14-15:
The weakness of the respondent’s argument and, conversely, the strength of the Commissioner’s argument, is that the provisions of the Act require, not that the name of the taxpayer be stated in the notice, but that the notice be served “upon the person liable to pay the tax” (s. 174(1)). The Full Court did not regard this as a decisive consideration. That was because Hill J. concluded that s. 177(1) would fail in its purpose unless the reference to “all the particulars of the assessment” in the subsection included the name of the taxpayer. The purpose which his Honour attributed to the subsection was to avoid the need in recovery proceedings for the Commissioner to prove that the taxpayer had a particular taxable income or net income in the case of a taxpayer trustee, or to debar the taxpayer from contesting that the amount of the taxable or net income as shown in the notice was the taxpayer's income or that tax was payable thereon. However, s. 177(1) does not require that the notice state the name of the taxpayer. Furthermore, s. 177(1) is a facultative provision; if the notice does not fall within the subsection, the only consequence is that the Commissioner cannot rely upon the provision.
This leads us to the conclusion that it is not essential to the validity of a notice of assessment that it state the name of the taxpayer liable to pay the tax. But we do not consider that this conclusion is a complete answer to the question which has arisen. That is because, on the view which we take of the provisions, it is necessary that the notice should bring to the attention of the person on whom it is served that the assessment to which it relates is an assessment of that person to tax. The principal purpose of the notice of assessment is to bring to the attention of the person on whom it is served that such person is liable to pay on the due date the amount of tax assessed in the notice on the income stated in the notice. No doubt service of the notice on a taxpayer goes some way towards achieving this purpose. But whether the purpose is achieved in a given case must depend upon the form and contents of the particular notice of assessment. Thus, to take an example given by Hill J. in the Federal Court, a notice assessing A to tax but served on B instead could not stand as a notice assessing B to tax.
The assessments and the other procedural steps taken in this proceeding should similarly be understood as assessments to, and as steps undertaken by, the partners by reference to their partnership name. That is consistent with s 94V(1)(a), which in terms expressly imposes obligations “on each partner” that otherwise “would be imposed” on the partnership. The express effect of s 94V(1)(a) is for the income tax laws to apply by the individual partners having the obligations which would otherwise have been imposed upon the partnership. There is no reason in the text or policy of Division 5A when read alone, or when read in the context in which it is found, to exclude from those obligations the liability to pay tax. Indeed, the natural meaning of the words in s 94V(1)(a), in the context of Division 5A, and in the context of the income tax law (as defined for the purpose of s 94V by s 94B), or by reference to policy or interpretative history, requires the inclusion of tax liabilities by assessments amongst the obligations which are made by the section to fall upon the partners “instead” of the partnership. This view also gives effect to modifications to the Administration Act effected by the definition of “income tax law” in s 94B which includes the objections and appeals provisions under Part IVC, and accommodates the power to object which is given by s 175A of the 1936 Act. The fact that the proceedings in this Court were commenced in the name of the partnership, as previously mentioned, is contemplated by r 9.41 of the Federal Court Rules 2011 (Cth) and, if there were any doubts, the General Partners have been added as applicants to the proceedings.
22 The applicants’ submissions, however, do not fit entirely consistently with their notices of objection or their appeal statements. The written, and oral, submissions at the hearing were based upon the proposition that the partners were the relevant taxpayers and that the partnerships were not separate taxable entities, but the formal documents preceding the written and oral submissions were not so explicit. The notices of objection and appeal statements read more consistently with the proposition which had been assumed in RCF III that the limited partnership was a separate taxable entity. Thus, for example, the notice of objection for RCF IV identified the taxpayer as the partnership, and in paragraph 3.1 referred to the taxpayer as “a Cayman Islands partnership” in contra distinction to the limited partners of the taxpayer, who in paragraph 3.2 were described as US residents. The tension between the case as argued and the objections as lodged can be seen from paragraph 3.3 of the notice of objection which referred to the taxpayers as the partnerships and distinguished the taxpayer from the partners. Paragraph 3.3 stated:
Consequently, it is the limited partners not the Taxpayer that Australia is authorized to tax under the [United States Convention].
The applicants’ case in the proceeding, however, was that the applicants, that is that the taxpayers, were the partners of the partnership who claimed directly the relief available under the United States Convention although the grounds of objection may not have been entirely consistent with that case. Section 14ZZO of the Administration Act limits an appellant to the grounds stated in the taxation objection to which the decision relates unless the court otherwise orders. No application was made in either proceeding to amend the grounds of objection, but the Commissioner did not object to the arguments which were maintained on behalf of the applicants in their written and oral submissions, nor did the Commissioner contend that the applicants’ arguments did not come within the objections or the appeal statements. It is possible, however, to construe, and these reasons assume, that the notices of objection were made by the limited partners upon the basis that the references to the taxpayer in the notices of objection are to be understood, when context requires, as references to the individual limited partners and at other times to the limited partnership as apparently defined. I would, in any event, otherwise give leave for the grounds of objection to be amended for them to conform with the submissions. The parties will be heard after publication of these reasons on whether any formal orders may need to regularise, or otherwise deal with, this aspect of the proceedings.
23 The applicants submitted that a consequence of the partnerships not being taxable entities was that those members of the partnership who were residents of the United States (and who are taken to be the taxpayers who have been assessed and are taken also subsequently to have objected and to be the applicants in these proceedings), were entitled to relief from taxation liability by reason of Article 7 of the United States Convention or by reason of the Commissioner being bound by Taxation Determination 2011/25 (“the Ruling”) in its application to Article 7. The issue is of considerable commercial importance both to the applicants and to others involved in international investment in Australia because the partnerships were established as a means of attracting private equity investment from the United States. The bulk of the investors in the respective RCF partnerships were US residents who had invested as partners in specific investment funds with a common corporate structure. The decision in RCF III had been based upon the premise, as mentioned, that the corporate limited partnership was a taxable entity for Australian tax purposes and that it, as had been found at first instance by Edmonds J, was a resident of the Cayman Islands and not of the United States of America. In these proceedings, in contrast, the applicants contended that the corporate limited partnerships were not separate taxable entities but that the partners of the partnership were the taxable entities of which 97% were residents of the United States of America able to claim the relief under Article 7 of the United States Convention.
24 The Commissioner submitted that the applicants could only rely upon any restriction upon Australia’s rights to tax under the United States Convention, or upon the effect of the Ruling, if the profits from the sale by the applicants of their shares in Talison Lithium in March 2013 was not otherwise ordinary income from an Australian source within the meaning of s 6-5 of the 1997 Act. The relationship between the Australian domestic taxing provisions and the effect of international agreements is both complex and fundamental. The tax imposed under Australian law is, of course, imposed by domestic legislation but it reflects international agreements by which taxing rights are allocated in bilateral international agreements between taxing authorities. Domestic taxation occurs in the context of international agreements between sovereign countries in which taxing rights are allocated and restricted. Taxation by reference to residence and source is fundamental to many international agreements and to the Australian tax system: see S. Barkoczy, Foundations of Taxation Law (Oxford University Press, 9th edition, 2017) [9.1]. International agreements are formally given domestic force of law in Australia by their incorporation into Australian domestic law.
25 Section 6-5(3) of the 1997 Act provides that the assessable income of a foreign resident includes the ordinary income derived by the foreign resident from all Australian sources. Section 6-5(3) provides:
(3) If you are a foreign resident, your assessable income includes:
(a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and
(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.
The application of this provision, and the impact of the United States Convention, and of the Ruling, requires consideration of the nature of the gain made by the partners and whether it was from an Australian source.
26 Each of the RCF IV and RCF V partnerships had one General Partner which had unlimited liability. Each also had limited partners who provided the investment capital to the partnerships. The General Partner of RCF IV was Resource Capital Associates IV LP (“the RCF IV General Partner”) and the General Partner of RCF V was Resource Capital Associates V L.P. (“the RCF V General Partner”). The General Partners of RCF IV and RCF V were responsible for the management and control of the partnerships and determined the form of investments. Each of the partnerships entered into a management agreement with RCF Management LLC (“RCF Management”) to manage the operations and investments of the partnerships through an investment committee (“the Investment Committee”).
27 RCF Management was a limited liability company incorporated in Delaware and was based in Denver, Colorado in the United States of America. RCF IV and RCV V, however, were established as limited partnerships in the Cayman Islands in accordance with the Cayman Islands Exempted Limited Partnership Law (1997 Revision) (“the ELP Law”). The reasons for this were explained by Mr Brian Dolan who was employed by RCF Management and was its in house legal counsel. Mr Dolan explained that:
10. The applicants were established as limited partnerships incorporated in the Cayman Islands for a number of reasons including:
(a) partnerships, in contrast to corporations, avoid entity-level tax for United States federal income tax purposes;
(b) capital gains earned by a partnership retain their character as capital gains rather than becoming dividend income paid to shareholders;
(c) incorporating the partnership outside the United States of America enables the limited partners to be taxed according to their individual interest determined by their proportionate ownership of the fund - that is, the fund would be “looked through” for the purposes of US revenue law; and
(d) the Cayman Islands imposes no additional tax burden on the fund in addition to its obligations to pay US taxes and allows the fund to be regulated by US securities law.
The treatment of partnerships for US tax purposes was therefore broadly the same as for Australian purposes; that is, that the taxable entities were the partners rather than the association they comprised.
28 RCF IV was formed pursuant to a written partnership agreement dated 7 July 2006 which was executed in Denver in the USA. Clause 2.1 of the RCF IV partnership agreement provided that the partners agreed to carry on an exempted limited partnership subject to the terms of the agreement in accordance with the ELP Law of the Cayman Islands. The RCF IV General Partner was identified in the RCF IV partnership agreement as the RCF IV General Partner and was a Cayman Islands limited partnership established under the ELP Law of the Cayman Islands which was formed pursuant to a written partnership agreement dated 7 July 2006 as amended and restated on 21 July 2006. The management of the RCF IV partnership was vested in the General Partner pursuant to clause 3.3.1 of the RCF IV partnership agreement. The General Partner of the RCF IV partnership was itself another partnership of which the General Partner was a limited liability company incorporated in Delaware in the United States called RCA IV GP LLC (“RCA IV GP”). RCA IV GP was added as an applicant to the proceeding on 31 August 2016. The RCF IV partnership was comprised of the RCF IV General Partner and 77 limited partners of which the Commissioner agreed 73 were resident in the United States.
29 The RCF V partnership was formed pursuant to a similar written partnership agreement dated 30 March 2009 (“the RCF V partnership agreement”) of which the General Partner was the RCA V General Partner being an exempted limited partnership established in the Cayman Islands pursuant to ELP Law. The General Partner of RCA V General Partner was RCA V GP Limited (“RCA V GP”), being a limited liability company incorporated in the Cayman Islands. The management and control of RCF V was vested exclusively in the General Partner pursuant to clauses 3.3 and 4.1 of the RCF V partnership agreement. RCA V GP was also added as an applicant to the proceedings on 31 August 2006. The RCF V partnership was comprised of a general partnership and 137 limited partners of which the Commissioner agreed 130 were resident in the United States.
30 Clause 4.1 of the RCF IV partnership agreement identified the investment objectives of the RCF IV partnership as follows:
The primary objective of the Partnership is to generate significant returns from investments in the mining and minerals industry (Portfolio Investments). The General Partner, in its sole discretion and subject to clause 4.2, will determine the form of each investment to be made by the Partnership, but it is anticipated that the investments will generally consist of secured and unsecured convertible debt securities, equity or other types of equity-related securities.
RCF Management was retained to provide management services pursuant to a management agreement entered into between it and the RCF IV partnership. Clause 3.1 of the management agreement provided that RCF Management would provide management services as follows:
3.1 Duties of the Management Company. Services to be rendered by the Management Company shall include, without limitation: (i) acting as the Fund’s investment advisor in, and manager of, the investment and reinvestment of the Fund’s assets; (ii) finding, investigating, negotiating and arranging the financing of prospective Portfolio Investments for the Fund; (iii) monitoring, reviewing, and assisting in the creation of value of, such investments; (iv) helping to realize values for the Fund by providing assistance in the sale, merger, initial public offering of, or other exit strategy for, Portfolio Companies; (v) advising as to the administration and/or management of the Fund; (vi) rendering investment research services, advice and supervision to the Fund; (vii) furnishing all administrative services to the Fund; (viii) providing the services of its members, officers and employees as directors, consultants and advisors for the Fund and Portfolio Companies; and (ix) otherwise providing assistance within the areas of expertise of its members and staff. In addition to the services of its own members and staff, the Management Company shall arrange for and coordinate the services of other professionals and consultants. The services to be rendered by the Management Company to the Fund under this Agreement are not to be deemed exclusive and, subject to limitations set forth in the Fund Partnership Agreement, the Management Company shall be free to render similar services to others. The services to be provided by the Management Company to the Fund as specified in this Section 3.1 are referred to as the “Services.”
RCF Management entered into an agreement with Resource Capital Funds Management Pty Ltd (“RCF Management (Aust)”) for the latter to provide administrative and management services to RCF Management for a fee equal to its cost plus a margin for administrative services. RCF Management (Aust) was a company incorporated in Australia with between 11 to 14 employees who had Australian residential addresses between 2007 and 2011, including Mr James McClements, Mr Ian Burvill, Mr Christopher Corbett and Mr Mason Hills.
31 The RCF IV partnership agreement and the RCF V partnership agreement both contemplated that the General Partner would have an Investment Committee to make the investment and divestiture decisions of the partnership. Between January 2007 and 25 March 2013 the Investment Committee was made up of Mr James McClements, Mr Hank Tuten, Mr Ryan Bennett, Mr Russ Cranswick, Mr Brian Dolan (until 30 June 2011), Mr Ian Burvill (until 1 March 2008), Mr David Thomas (from 30 April 2012) and Dr Ross Bhappu. Four of the six members of the Investment Committee between 23 April 2007 and 31 December 2011 lived in the United States of America and the evidence of Mr Dolan was that all of the meetings of the Investment Committee during the period that he was a member were chaired by a member who was present either in Denver, Colorado or elsewhere in the United States.
32 Dr Bhappu tendered evidence of examples of information given to investors which explained how RCF invested and monitored the progress of the investments on behalf of the partnerships including RCV IV and RCF V. The typical business activities were planned to include the active investment by RCF Management in companies and businesses in which the RCF partnerships invested. A paper prepared in 2009 of frequently asked questions and answers explained the business activities as follows:
Discuss how the Fund will monitor portfolio investments. Are there specific individuals dedicated to monitoring investments?
RCF typically remains actively involved with portfolio investments through participation on Board of Directors or by actively working with a company’s management team. The Partner or Principal responsible for sourcing the investment will typically remain involved with the investment from sourcing through to exit.
What methods if any do you use to detect early problems that may be developing in your investments?
RCF management team members sit on the boards of directors of most core portfolio companies in which a substantial investment has been made. As a director, potential problems are recognized at a very early stage and can be mitigated to the extent possible. Typically, the problems require expertise within the company that it may be lacking. RCF has been instrumental in introducing new management and expertise to portfolio companies to assist them in growing and advancing their projects. All investment companies are required to provide monthly or quarterly reports. Regular visits to each company and its projects are also undertaken.
In what situations would your firm insist on replacing the current management team at a portfolio company? How would you go about doing this?
RCF replaces or enhances management and boards of portfolio companies as required on a regular basis. Typically these changes are due to the existing team simply not having the required expertise. Changing or enhancing management teams is not uncommon and is usually done in a friendly manner where the existing portfolio company management team recognizes their limitations. Quite frequently, RCF as part of the terms and conditions for investing will require certain management team changes or additions to augment the existing team.
In extreme cases, RCF will work with other major shareholders to force a change.
Describe your post-investment monitoring process. How frequently are you in contact with company management?
An RCF management team member is typically appointed to the Board of Directors of the portfolio company. In this role, the manager is intimately involved in the company and is in weekly contact with the company's management. The manager reports to the Investment Committee on a regular basis and discusses the investment with the broader management group at work-in-progress meetings as well as formal reporting on a quarterly basis.
What percentage of portfolio companies do you plan on obtaining Board seats? What percentage of portfolio companies do you plan on obtaining Board observer status?
Board seats are taken on all core investments. Board seats are typically not taken on portfolio companies in which small strategic equity investments are made.
The business activities typically also included contemplation of the subsequent disposal of the assets acquired by the partnerships. The 2009 paper described this in the context of the exit strategies which were explained to the partners as follows:
Describe the various exit strategies you plan to use. What type of market conditions would make it difficult to execute these strategies?
The Fund's exit strategies are anticipated to follow the pattern established in the predecessor RCF Funds and will generally involve one of the following alternatives:
• Takeover of the company by another industry participant -trade sales.
• Selling equity positions into the market (secondary sales) or to large institutional buyers on a negotiated basis.
• Listing of investments on public markets (IPO's), primarily the Toronto Stock Exchange (“TSX”), the Australian Securities Exchange ("ASX") and the Alternative Investments Market in London (“AIM”). Full or partial exits may occur at the time of listing.
• Repayment of convertible debt by the company. Often the repayment of debt involves negotiations on timing and results in a small residual equity interest, which is then sold.
It is interesting to note that even in the very early years (1998-2002), during a period of low commodity prices; RCF was still able to exit approximately 20% of its portfolio holdings on an annual basis.
The 2009 paper was prepared for the RCF V partnership but Dr Bhappu agreed that the description applied also to the RCF IV partnership. In oral evidence Dr Bhappu agreed with the description of the business activity of the RCF partnerships as being that the investors would “go in, make the investment, improve the performance of the company concerned and then seek to exit within three to six years after that time, having made a profit”.
33 In April 2007 RCF Management considered a possible investment by RCF IV in the Australian tantalum and lithium businesses of Sons of Gwalia Ltd (“Sons of Gwalia”). The employees of RCF Management had begun to watch the progress of the administration of Sons of Gwalia NL since it was put into administration in about August 2004 and Mr McClements had noted at a meeting of the RCF Investment Committee on 9 January 2007 that Sons of Gwalia tantalum was “fairly active”, that an indicative expression of interest had been given on behalf of RCF, and that entities, including Farallon, Fortress and Goldman Sachs, were also interested.
34 Sons of Gwalia NL had for many years been a successful publicly listed company with a market capitalisation in excess of A$1 billion at its peak. The assets included a specialty minerals division which in 2007 were being managed by the administrators on behalf of the creditors. On 2 April 2007 an Investment Committee paper was prepared for a possible investment by the RCF IV partnership “[t]o approve the provision of a financing facility to enable the tantalum/lithium assets of Sons of Gwalia (administrators appointed) to exit the administration process and to begin operating as a standalone company” to be called Talison Holdings Ltd. The Investment Committee paper of 2 April 2007 proposed the participation by RCF IV in a consortium with Goldman Sachs, Fortress and Farallon to provide debt facilities in an amount of A$145 million to enable Talison Holdings Ltd to operate independently. On 3 April 2007 the Investment Committee met to consider the paper and the minutes recorded that Mr Tuten participated by telephone from Sydney, that Mr McClements and Mr Burvill each participated from Perth, (with Mr McClements participating by video and Mr Burvill participating by telephone), that Mr Burnett participated from Montrose by telephone, and that Messrs Cranswick, Bhappu and Dolan participated from Denver by video conference. Others participating in the meeting by invitation by video conference from Perth included Mr Peter Nicholson, Mr Mason Hills and Mr Graham Smith. During the meeting it was remarked that the facility was seen by RCF as a “loan to own” strategy giving RCF a very strong secured position and a chance to own the business if Talison Holdings Ltd did not operate as expected. The Investment Committee voted unanimously in favour of the proposal and approved the transaction.
35 On 23 April 2007 the Investment Committee met again to consider a supplementary paper prepared for the proposed investment by RCF IV. The form of the proposed investment had by then changed from one of refinancing to an acquisition of the assets of Sons of Gwalia through a company to be newly formed by a consortium constituted by Fortress, Farallon, Goldman Sachs and RCF IV. The proposal at that time was that the consortium would capitalise and finance a new holding company to enable it to make an offer to the administrators to acquire the tantalum/lithium assets of Sons of Gwalia for an amount of US$150 million on an enterprise value basis. Under this proposal RCF IV was to invest an amount of up to US$51,750,000 and to assume a contingent liability of A$9 million to assist in financing the acquisition of the assets on the terms contemplated by the supplementary paper which was considered by the Investment Committee. The Investment Committee met at 4.10 pm MDT with Messrs Bennett, Bhappu and Cranswick again participating from Denver by video conference, Mr Dolan participating from Buenos Aires by telephone conference, Mr McClements participating from Perth by video conference and Mr Tuten participating from Sydney by telephone conference. Mr Burvill was absent from the meeting but by invitation Ms Sherri Croasdale participated by telephone conference from New York, Mr Graham Smith participated from Perth and Mr Jasper Bertisen participated from Denver. The Committee unanimously approved the investment which had been proposed in the supplementary Investment Committee paper but did not consider any particular exit strategy. Dr Bhappu’s evidence was that a possible exit strategy was not considered at that time because the investment was intended to be for an indefinite period, but his evidence was not that the investment was intended to be a permanent holding of interests in the company. His evidence that an exit strategy was not considered at the April 2007 meeting was not that there had been a change in business strategy of the RCF partnerships which Dr Bhappu had agreed in evidence to include an ultimate realisation of profit by disposal.
36 On 24 May 2007 Lita Holdings Pty Ltd (“Lita”) was incorporated as the vehicle for the consortium to acquire the lithium and tantalum businesses of the Sons of Gwalia. Lita subsequently changed its name to Talison Minerals Pty Ltd (“Talison Minerals”) on 28 August 2007. On 7 June 2007 Lita entered into a shareholders’ deed (“the shareholders’ deed”) with the consortium made up of RCF IV, Goldman Sachs JB Were Capital Markets Limited, DBSO DU II LLC (a Fortress entity), Mineral Investors LP (a Farallon entity) and Triumph II Investments (Ireland) Limited (a Triumph entity). The corporate structure of Lita as at 8 June 2007 may be shown diagrammatically as follows:
The shareholders’ deed between the consortium members and Lita governed the relationship between the consortium members as shareholders of Lita, and required each member of the consortium to subscribe for a certain number of shares in Lita. The shareholders’ deed was signed by Ian Burvill in Perth on behalf of the RCF IV partnership which was described in the execution provisions as “Resource Capital Fund IV LP, By Resource Capital Associates IV LP, GP, By RCA IV GP LLC”. The funds necessary to purchase RCF IV’s shares in Lita were paid from RCF IV’s account between 23 July 2007 and 30 July 2007 from RCF IV’s bank account with Silicon Valley Bank located at 3003 Tasman Drive, Santa Clara, California, USA. The shareholders’ agreement provided that the RCF IV partnership would hold 32,500,000 shares in Lita on the subscription date, representing 65% of the shares. On 7 June 2007 Lita also entered into a purchase and sale agreement with others to purchase the “business assets” (as defined) for a consideration of A$171,387,500 of “the advanced minerals mining business carried out by the Seller Group using the Business Assets”.
37 Further funding was provided to Lita/Talison Minerals between June 2007 and June 2010 by the members of the consortium by way of debt and equity. On 23 August 2007 the consortium members and Lita executed a deed of amendment to the shareholders’ agreement varying the number of ordinary shares and preference shares that each consortium member was required to subscribe for. Clause 2 of the deed of amendment required each member of the consortium to subscribe for the following number of shares in Lita:
The deed of amendment was signed on behalf of RCF IV in Perth by Mr Mason Hills as General Partner of Resource Capital Associate IV LP as General Partner of RCF IV. Lita issued shares to RCF IV and to each of the consortium members in accordance with its subscription obligations under the deed of amendment. In September 2007 RCF IV subscribed for a further A$9.2 million equity in Talison Minerals. In April 2008 RCF IV subscribed for a further A$9.2 million shares in Talison Minerals, bringing the total equity investment in Talison Minerals to A$59.5 million. In February 2010 RCF IV converted a letter of credit in an amount of US$8.66 million into further ordinary equity in Talison Minerals (which by then was no longer named Lita). The RCF V partnership was created in March 2009 and the limited partner of RCF V partnership also contributed funds by debt and equity in Talison Minerals.
38 Talison Minerals was restructured in November 2009 and its assets were divided between Talison Tantalum Pty Ltd (“Talison Tantalum”) and Talison Lithium Pty Ltd (“Talison Lithium”). Talison Tantalum came to hold the tantalum mining business of Talison Minerals, and Talison Lithium came to hold the lithium mining business of Talison Minerals. The lithium assets of Talison Minerals which had been owned by a subsidiary, namely, Talison Greenbushes Pty Ltd (“Greenbushes”), were sold on 13 November 2009 to a then newly incorporated company called Talison Lithium Australia Pty Ltd (“TLA”) which was a wholly owned subsidiary of Talison Lithium and which, in turn, was wholly owned by Talison Minerals. The corporate structure of Talison Minerals (which had formerly been named Lita) as at 14 November 2009 may be shown diagrammatically as follows:
Under the agreement Talison Minerals transferred rights to certain tenements but reserved (under clause 9) the rights to enter any of those tenements and to explore for and to mine any minerals other than lithium on the terms set out in the reserved rights agreement entered into between Greenbushes and TLA. The non-lithium assets of Talison Minerals were sold on 13 November 2009 to another then newly incorporated company, namely, to Talison Tantalum.
39 On 19 November 2009 Talison Lithium appointed Computer Investor Services Inc (“Computershare Canada”), a Canadian company with its office in the city of Toronto, to act as the branch registrar and transfer agent in connection with the shares held in Talison Lithium, and listed Talison Lithium on the Toronto Stock Exchange. The branch register agreement was to enable holders of shares in Talison Lithium to register and to trade their shares on the Toronto Stock Exchange. The shares held in the name of RCF IV LP and RCF V LP were registered on the Canadian register as at 22 September 2010 and the shares held by RCF IV and RCF V in Talison Lithium continued to be held on the Canadian register so that they could be traded on the Toronto Stock Exchange if necessary.
40 Differing views appear to have emerged by June 2010 between the members of the consortium about the future of their investment, and on 4 June 2010 the Investment Committee met to consider a proposal to restructure Talison Minerals by separating the ownership of the tantalum and the lithium businesses and to undertake an initial public offering of the lithium portfolio on the Toronto Stock Exchange with a compliance listing on the Australian Stock Exchange. The proposal was set out in an Investment Committee paper dated 4 June 2010 and was to involve both RCF IV and RCF V. The proposal included an equity investment by RCF V of US$14 million (Mr Dolan’s evidence was of an amount of A$14 million but that is probably a typographical error that was meant to refer to $US) in an equity raising prior to the initial public offer to assist in funding a portion of the repayment of US$45 million of senior debt. RCF V was also to underwrite the public offer by Talison Lithium in an amount of C$40 million. RCF V’s minimum commitment was contemplated to be US$14 million with a maximum of US$54 million on the basis of US$17 million being invested in a pre-initial public offering plus a potential maximum commitment under the underwriting facility of C$37 million converted to USD at an exchange rate of 0.97. The proposal was to involve RCF IV (a) applying A$4 million of the debt owed to RCF IV by Talison Minerals towards participating for a proportion of the funding of the repayment of US$45 million of Talison Minerals senior debt, and (b) applying the balance of the debt then owed to RCF IV by Talison Minerals towards a loan to Talison Tantalum in the amount of A$4.5 million to support its environmental bonding obligations. The Investment Committee meeting on 9 June 2010 approved the proposal of providing financial support for an investment in Talison Minerals by RCF IV and RCF V. Five committee members participated in that meeting: Messrs McClements, Bennett and Dolan were in Toronto, Dr Bhappu was in Denver and Mr Tuten was in Sydney. Others were recorded as participating by invitation but their location was not recorded in those minutes.
41 On 29 July 2010 the Investment Committee met to consider approving a merger between the lithium business of Talison Minerals and that of Salares Lithium Inc (“Salares”) which owned a number of lithium brine salars in the Atacama Desert in Chile. The lithium business of Talison Minerals at that time had been producing approximately 30% of the world’s lithium but the balance of the lithium production came from brine salars principally located in Chile. Salares had 100% control of a very substantial lithium resource that was considered to have the potential to add significant value to Talison Minerals. The Investment Committee approved the proposal on 29 July 2010 for the merger of Talison Minerals and Salares and for the merger entity to participate in the reorganisation of Talison Minerals and in the raising of capital. Two of the five members of the Investment Committee who were present at that meeting participated in the meeting from Australia with the other three being in Denver, Colorado. The merger between Talison Lithium and Salares was effected by an arrangement agreement on 12 August 2010.
42 In August 2010 Salares and Talison Lithium entered into an agreement for the merger of their respective lithium assets. The merger agreement was announced on 13 August 2010 and was to occur through a Canadian Plan of Arrangement. On 11 August 2010 a shareholder reorganisation deed had been entered into by members of the consortium and RCF V, Talison Minerals and Talison Lithium. The shareholder reorganisation deed made provision for a number of matters including that: (a) the shareholders in Talison Minerals were to execute a circular resolution approving an in-specie distribution of the shares in Talison Tantalum pro rata to their shareholding in Talison Minerals; (b) RCF IV was to subscribe for an additional 5 million shares in Talison Minerals at a price of US$3.3 million and RCF V was to subscribe for 25,606,061 shares in Talison Minerals at a price of US$16.9 million; (c) RCF IV was to pay the subscription price for its shares by the release of debt owed by Talison Minerals to it; and (d) RCF IV, RCF V and other members of the consortium were to grant Talison Lithium an option to purchase their shares in Talison Minerals in consideration for the issue of shares in Talison Lithium which required RCF IV to exchange 104,854,016 shares in Talison Minerals for 26,398,221 shares in Talison Lithium. Talison Minerals nominated 12 August 2010 as the date for completion of these matters, and on 12 August 2010 RCF IV, RCF V, other consortium members and Talison Lithium signed a Talison Lithium shareholders’ deed. That deed made provision for a number of matters including that: (a) 48% of the shares in Talison Lithium were to be held by RCF IV and RCF V, with the balance being held by other consortium members and employee shareholders; (b) the consortium members agreed that it was their then present intention to consider strategies to implement an exit from the investment, provided that the earnings performance of the Lithium Group had increased and the general market conditions for an exit were reasonable; (c) the Board of Talison Lithium was to consist of a maximum of 11 directors; (d) each relevant shareholder was entitled to appoint one director for every 12.5% of the Talison Lithium shares they held and that for this purpose two shareholders could elect to be treated as one shareholder; and (e) the Board of Talison Lithium as at the date of the Talison Lithium shareholders deed was to consist of five persons, one of whom was Mr Mason Hills, an employee of RCF Management, (Aust).
43 On 19 August 2010 Talison Lithium and Salares announced the closing of a C$40 million brokered private placement of 32,128,515 subscription receipts of Salares issued at C$1.245 which raised gross proceeds of C$40 000,001.18. The result was to give Talison Lithium shares an implied value of C$3.50 (that is, C$1.245 multiplied by 1/0.35587). On 22 September 2010 Talison Lithium and Salares announced the completion of the merger by way of a Canadian Plan of Arrangement and the planned listing on the Toronto Stock Exchange on 23 September 2010. On 23 September 2010 Talison Lithium announced the anticipated commencement of trading of shares in Talison Lithium at the opening of the market on that day.
44 The subsequent disposal by RCF IV and RCF V of the shares in Talison Lithium occurred in 2013 under agreements reached in December 2012 following a proposal from Chengdu Tianqi Industry Group Co Ltd (“Tianqi”). The proposal by Tianqi had been preceded by an offer from senior management of Rockwood Holdings Inc (“Rockwood”) in New York to bid for the shares. On 31 July 2012 a meeting was initiated by senior management of Rockwood at which they informed Dr Bhappu, Mr McClements and Mr Hills that Rockwood wished to make an offer for the shares in Talison Lithium. Dr Bhappu was asked in oral evidence about the meeting and in answer he described the meeting as a “negotiation for what RCF would be willing to take as a major shareholder”. In his affidavit he had also said that RCF IV’s involvement in the Rockwood bid was limited to supporting the Rockwood bid as it had been expressed at the 31 July 2012 meeting, but that Talison Lithium was responsible for managing the bid and for preparing the relevant transaction documents. On 23 August 2012 Talison Lithium announced that it had entered into a scheme implementation agreement with Rockwood under which Rockwood intended to acquire all of the issued shares in Talison Lithium for a cash consideration of C$6.50 per share via a scheme of arrangement. Rockwood also intended to acquire under a separate scheme of arrangement all of the options that Talison Lithium had on issue for a cash consideration equal to the difference between C$6.50 and the option exercise price.
45 On 23 August 2012 the Board of Talison Lithium announced that it recommended that the shareholders and option holders vote in favour of the Rockwood scheme in the absence of a superior proposal. On 25 October 2012 the Federal Court made orders that a meeting be convened on 29 November 2012 of Talison Lithium shareholders and option holders to consider the Rockwood scheme. On 19 November 2012, however, Tianqi made an offer to acquire the shares in Talison Lithium via its subsidiary, Windfield Holdings Pty Limited (“Windfield”), at a price of C$7.15 per share by way of a scheme of arrangement. Tianqi was an existing shareholder in Talison Lithium and a purchaser from Talison Lithium.
46 The Tianqi proposal was considered by the Board of Talison Lithium to be superior to the proposal which had been made by Rockwood. On 6 December 2012 a conference call was held in which senior officers of RCF participated. Those attending the conference call were identified by Dr Bhappu as being Mr James McClements, Mr Hank Tuten, Mr Ryan Bennett, Mr Russ Cranswick, Mr David Thomas, Ms Sherri Croasdale, Ms Catherine Boggs, Mr Mason Hills, Mr Chris Corbett, Mr Michael Rowe and Mr Quinn Roussel. Mr McClements advised the meeting that the Board of Talison Lithium considered the Tianqi proposal for a scheme of arrangement to be superior to that proposed by Rockwood and that the Board recommended the shareholders to support the Tianqi proposal. He informed the meeting that Talison would no longer be pursuing the Rockwood proposal for a scheme of arrangement and it was recorded at the meeting that RCF IV and RCF V intended to vote their shares consistent with the recommendation of the Board of Talison Lithium. On that day a press release was issued by Talison Lithium announcing that it had concluded its discussions with Windfield and had reached agreement under which it was proposed that Tianqi would acquire, by way of a scheme of arrangement, the balance of the ordinary shares that it did not already own, and to acquire the options in Talison Lithium for a cash consideration of C$7.50. Windfield was obliged in accordance with the scheme implementation agreement to pay the scheme consideration into nominated trust accounts in the name of Talison Lithium. One account was denominated in Canadian dollars for non-Australian security holders and the other was denominated in Australian dollars for Australian security holders. The scheme consideration was payable on 20 March 2013, being five business days after the record date as defined by the agreement.
47 In early February 2013 the scheme booklet for the Tianqi scheme was published in accordance with s 412(1) of the Corporations Act 2001 (Cth) (“the Corporations Act”). On 27 February 2013 Talison Lithium announced that a resolution had been passed by the requisite majority at a meeting of its security shareholders to approve the share scheme and the option scheme. The scheme documents had provided that holders of shares listed on the Canadian Branch Register would be required to deliver their proxies to Computershare Canada. RCF IV exercised its voting rights in appointing the chairman as its proxy. On 12 March 2013 the Federal Court approved the share scheme and the option scheme and the orders made by the Court under s 411 of the Corporations Act were lodged with the Australian Securities and Investments Commission with the consequence that the scheme became effective.
48 On 19 March 2013 the Talison Lithium security holders became entitled to receive the scheme consideration. As at 20 March 2013 RCF IV held, on behalf of limited partners, 26,398,222 (being 23.1%), and RCF V held 14,987,505 (being 13.1%), of the shares on issue of Talison Lithium. The terms of the share scheme and option scheme provided that Talison Lithium security holders were divided between those whose registered address was in Australia and those whose registered address was other than in Australia. The latter were defined as “the Canadian Scheme Shareholder”. RCF IV and RCF V were each a “Canadian Scheme Shareholder” and were paid for their shares in Canadian currency. The consideration payable to RCF IV pursuant to the Tianqi scheme was C$197,986,665 and the consideration payable to RCF V was C$112,406,287.50.
49 On 25 March 2013 the Commissioner issued notices of assessment for the income year ended 30 June 2013 pursuant to s 168 of the 1936 Act. One assessment was in the name of “Resource Capital Fund IV LP” and sent to the General Partner of “Resource Capital Fund IV LP” ascertaining an amount of A$116,835,066 with tax payable thereon in the sum of A$35,050,519.80. The second assessment was made in the name of “Resource Capital Fund V LP” and sent under covering letter addressed to the General Partner of “Resource Capital Fund V LP” ascertaining an amount of taxable income of A$61,577,787 and the tax payable thereon in the sum of A$18,473,336.10.
50 The amounts received by the RCF IV and the RCF V partners were income according to the ordinary concepts within the meaning of s 6-5(3) of the 1997 Act. Ordinary income for the purposes of s 6-5(3) is defined by s 6-5(1) to include “income according to ordinary concepts”. Jordan CJ said in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219 that the word “income” was not a term of art and that what receipts ought to be treated as income was to “be determined in accordance with the ordinary concepts and usages of mankind”. It has long been held that income may be derived from an isolated transaction where it arises from a business operation or commercial transaction entered into with the intention or purpose of making a profit or gain from the transaction: see Californian Copper Syndicate Ltd v Harris (Surveyors of Taxes) (1904) 5 TC 159; Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199, 211; Commissioner of Taxation v Montgomery (1999) 198 CLR 639, -. A receipt from an isolated transaction may be stamped with the character of income where the profit purpose or profit making intention can be seen from the receipts arising in the ordinary course of the business, or where the receipt is an incident of the business: see London Australia Investment Co Ltd v Federal Commissioner of Taxation (1977) 138 CLR 106, 117-8, 128, 130. A receipt may not have the character of income where it was derived outside of the ordinary scope of the business and the taxpayer did not have the purpose of making profit by the very means by which the profit was in fact made (see Westfield Ltd v Federal Commissioner of Taxation (1991) 28 FCR 333, 344) but the receipt will bear the stamp of income where the taxpayer, as here, did have the purpose of making profit from the ultimate disposal of investments. It is true, as was submitted for the applicants, that the details of the disposal were not contemplated at the time of the investments, but profit by “the very means by which the profit was in fact made” (see Westfield Ltd v Federal Commissioner of Taxation (1991) 28 FCR 333 at 344) was part of the purpose of profit making undertaken by the partners in the partnership: see also Steinberg v Federal Commissioner of Taxation (1975) 134 CLR 640, 669-670, 715-716; and Visy Packaging Holdings Pty Ltd v Federal Commissioner of Taxation (2012) 91 ATR 810, -. Profitable realisation of the investment by disposal was an objective of the investment by the RCF partnerships from the beginning. Dr Bhappu agreed in cross-examination “that the sale of the Talison investment made by RCF IV and RCF V at a profit was the investment committee’s objective when each fund originally acquired those investments” and added that it was “an objective of all [of their] investments”.
51 The more difficult aspect of the application of s 6-5(3) of the 1997 Act is whether the income was derived from an Australian source. The ascertainment of the source of income has been described as “a practical, hard matter of fact”: see Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183, 190; see also Federal Commissioner of Taxation v Crown Insurance Services Ltd (2012) 207 FCR 247, -. The factors that will be relevant to the ascertainment of the source of income will vary from case to case, and will vary as between different kinds of income. The place of the performance of services is likely to be significant to determine the source of income derived from personal exertion: see Federal Commissioner of Taxation v French (1957) 98 CLR 398, 414-415, 420-421; Federal Commissioner of Taxation v Mitchum (1965) 113 CLR 401, 408; Federal Commissioner of Taxation v Efstathakis (1979) 38 FLR 276. The location of the property will be significant when the income is derived from property (see Federal Commissioner of Taxation v United Aircraft Corporation (1943) 68 CLR 525, 536), and the place where a taxpayer has performed income earning operations will be significant where the income is derived from a service of operations (see Commissioner of Inland Revenue v HK-TVB International Ltd  2 AC 397, 404, 408-409). Section 6-5(3) of the 1997 Act adds the phrase “directly or indirectly” to the ambit of the source of derivation, but it is not entirely clear what role was intended by use of the adverbial phrase “directly or indirectly” in s 6-5(3) of the 1997 Act. The Commissioner submitted that the phrase directs attention “not merely to the proximate origin of the income, but also to those acts or matters which constitute contributory causes to the generation of income”, however, the adverbial phrase quantifies the word “derived” in the section rather than the word “source”. It can be accepted that non-proximate contributory causes may be relevant to ascertain the source of derivation but the adverbial phrase does not lessen or reduce the need to find that that which was derived was from an Australian source.
52 There is no doubt that there was a significant connection between Australia and the profit derived by the partners upon their disposal of shares. Talison Lithium was an Australian company whose assets and businesses were substantially located in Australia but the income was derived from a more complex series of business activities which included many that were not in Australia. In that context the applicants submitted that the gains did not have an Australian source because: (a) all decisions and negotiations for the investment in Talison Minerals were made by the Investment Committee of the general partner outside Australia; (b) monitoring of the investment was conducted by the Investment Committee of the general partner outside Australia; (c) all decisions and negotiations regarding the disposal of the investment were made by the Investment Committee of the general partner outside Australia; (d) the limited partners could not and did not take any part in the management of the partnership and were passive investors; (e) before making important decisions, the Investment Committee of the general partner took advice from the management company, RCF Management, outside of Australia; (f) the shares which were disposed of were listed and were freely tradable on the Toronto Stock Exchange; and (g) the consideration for the disposal of shares was paid on behalf of Tianqi, a Chinese company, and was payable and received outside Australia and in Canadian dollars.
53 Determining the source of derivation requires ultimately a judgment in which various factors bearing upon the source of derivation will have differing weight. In Spotless Services Ltd v Federal Commissioner of Taxation (1993) 25 ATR 344 Lockhart J said at 359:
The cases demonstrate that there is no universal or absolute rule which can be applied to determine the source of income. It is a matter of judgment and relative weight in each case to determine the various factors to be taken into account in reaching the conclusion as to source of income.
In this case the various factors to be taken into account point to an Australian source of the gains made from the disposal of the shares. The ultimate profit from the disposal was part of the entire business strategy which included substantial activity in Australia. The fact that the business and assets were in Australia might not of itself be sufficient to make Australia the ultimate source of the gain derived upon the disposal of the shares, but the location in Australia of the business and assets, and the nature and extent of the business and assets, occasioned substantial activities in Australia that were an integral part of the investment, its management, and its ultimate profitable disposal. It is, of course, important to keep in mind that the source of the value of an asset is not the same as the source of the derivation of the profit which captures the value of the asset, but in this case that distinction is difficult to maintain because the source of the derivation of the profit was linked with the source of the value of the shares that were disposed. That, in this case, may perhaps be explained by the nature of the investment which contemplated the acquisition of a business to be restructured, made profitable and then disposed. RCF Management Australia maintained an office in Australia from which RCF IV’s and RCF V’s investments in Talison Minerals and Talison Lithium were managed. RCF Management Australia had employees living in Australia including Messrs McClements, Hills and Corbett. They played an active role in the management, including the ultimate disposal, of the investment. They frequently participated from Australia in Investment Committee meetings and, with others in Australia, prepared the papers for consideration and decision by the Investment Committee. Messrs Hill and Corbett, and subsequently Mr Hepburn, were designated by title as transaction managers in relation to the investment in Talison Lithium. An element of the investment strategy of the RCF IV and RCF V partnerships was for members of the RCF Management team to occupy positions on boards of the companies in which RCF invested to guide management and to contribute to an increase in the value of the investments which were intended to be sold at a profit. That function was performed by employees in the Perth office, namely, by Mr McClements and Mr Hills, and upon the latter’s departure for Denver in June 2012, by Mr Corbett. Mr Hills gave evidence of significant work undertaken by him as a director of Talison Minerals and Talison Lithium. Dr Bhappu confirmed in cross-examination his understanding as a member of the Investment Committee that the role of Mr McClements and Mr Hills as directors of Talison Lithium and Talison Minerals was developing the strategy over time in those companies of the Investment Committee. He agreed that at the relevant times members of the investment team in the Perth office were managing the investment by RCF. The fact that the shares were sold pursuant to a scheme of arrangement carried out in Australia pursuant to the Corporations Act and under the supervision of the Federal Court might similarly, by itself, be insufficient to conclude that the source of the gain was Australia, but it was an essential aspect of the sale as it ultimately proceeded, adding something to that conclusion.
54 It becomes necessary to consider whether the partners are nonetheless entitled to relief from taxation by reason of the United States Convention or by reason of the Ruling. The members of each of the RCF IV and RCF V partnerships contended that they are entitled to relief from taxation liability by reason of Article 7 of the United States Convention and also that the Commissioner was bound to apply taxation determination 2011/25.
55 Article 7 of the United States Convention restricts Australia’s ability to tax the business profits of an enterprise of the United States unless the enterprise carries on business in Australia through a permanent establishment or the business profits of an enterprise include an item of income which is dealt with separately in other articles of the United States Convention. Article 7 of the Convention provides:
(1) The business profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as·is attributable to that permanent establishment.
(2) Subject to the provisions of paragraph (3), where an enterprise of one of the Contracting States carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises with which it deals.
(3) In the determination of the business profits of a permanent establishment, there shall be allowed as deductions expenses which are reasonably connected with the profits (including executive and general administrative expenses) and which would be deductible if the permanent establishment were an independent entity which paid those expenses, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere.
(4) No business profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
(5) For the purposes of the preceding paragraphs of this Article, the business profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
(6) Where business profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.
(7) Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person in cases where the information available to the competent authority of that State is inadequate to determine the profits to be attributed to a permanent establishment, provided that, on the basis of the available information, the determination of the profits of the permanent establishment is consistent with the principles stated in this Article.
(8) Nothing in this Article shall in a Contracting State prevent the operation in that State of its law relating specifically to the taxation of any person who carries on the business of any form of insurance (as long as that law as in effect on the date of signature of this Convention is not varied otherwise than in minor respects so as not to affect its general character).
(a) a resident of one of the Contracting States is beneficially entitled, whether directly or through one or more interposed fiscally transparent entities, to a share of the business profits of an enterprise carried on in the other Contracting State by the fiscally transparent entity (or, in the case of a trust, by the trustee of the trust estate); and
(b) in relation to that enterprise, that fiscally transparent entity (or trustee) would, in accordance with the principles of Article 5 (Permanent Establishment), have a permanent establishment in that other State, that enterprise carried on by that fiscally transparent entity (or trustee) shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated in that other State and that share of business profits shall be attributed to that permanent establishment.
Article 7 is a fundamental pillar in the allocation of taxing rights between Australia and the United States of America. It adopts the principle that business profits of an enterprise are ordinarily only to be taxed by the country of the enterprise. There are, however, two exceptions to that principle: see C. Garbarino Judicial Interpretation of Tax Treaties, (Edward Edgar Publishing, 2016), CL 4; M. Kobetsky, International Taxation of Permanent Establishment (Cambridge University Press, 2011), 196-7, 357-9. The first is that business profits may be taxed in the place where the enterprise has a permanent establishment but it was not contended that the taxpayers had a permanent establishment in Australia. The second is that Article 7 does not apply to items of business profits which are dealt with separately by other articles such as Article 13. The effect of Article 7 for RCF IV and RCF V is, therefore, that the partners would not be taxable by Australia if they come within its terms unless their profits include items which are dealt with separately by another Article.
56 The provisions of the United States Convention are incorporated into Australian domestic law by s 5(1) of the International Tax Agreements Act 1953 (Cth) (“the Agreements Act”). Australian domestic taxing provisions, as previously mentioned, are enacted in the context of bilateral agreements between Australia and other countries which allocate taxing rights between the contracting countries. Those agreements are formally incorporated into Australian law and generally override domestic provisions except for the domestic general anti-tax avoidance rule. Section 5(1) of the Agreements Act provides that a provision of an agreement mentioned in that section, which includes the United States Convention, has the force of law according to its tenor. Section 4 provides that the 1936 Act and the 1997 Act are to be read with the Agreements Act and that the provisions of the 1936 Act and the 1997 Act are overridden by the Agreements Act to the extent of any inconsistency. Section 4 of the Agreements Act provides:
Incorporation of Assessment Act
(1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.
Note: An effect of this provision is that people who acquire information under this Act are subject to the confidentiality obligations and exceptions in Division 355 in Schedule 1 to the Taxation Administration Act 1953.
(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IV of the Income Tax Assessment Act 1936) or in an Act imposing Australian tax.
The “Assessment Act” for the purposes of this provision is defined in s 3(1) of the Agreements Act as the 1936 Act and the 1997 Act. Both are incorporated by s 4 of the Agreements Act into that Act and are to be read as one with that Act but the provisions of the Agreements Act override those of the 1936 Act and of the 1997 Act. The proviso in s 4(2), however, ensures that the anti-avoidance provisions in Part IVA of the 1936 Act have paramount force, but the provisions of Part IVA are not relevant to, and have no application in, these proceedings.
57 The application of Article 7(1) requires identification of the business profits of an enterprise. In the present case the enterprises in question are the partners to the RCF IV partnership and the partners of the RCF V partnership. There is no suggestion, as mentioned above, that those enterprises carried on business through a permanent establishment in Australia for the purposes of Article 7(1) leaving for determination whether their profits from the disposal of shares and interests were of “enterprises of” the United States within the meaning of Article 7(1). The High Court considered the expression “enterprise carried on by” in Article 3 of the comparable provision in the bilateral agreement between Australia and Switzerland in Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338, and explained that an enterprise was the activities including a passive investment activity. At 345 of the joint judgment their Honours said:
Article 7, especially the heading “Business Profits”, supports the notion that one or more transactions entered into for business or commercial purposes is an enterprise for the purposes of the Agreement. The result is that the activities of the taxpayer in this case constituted an enterprise and were an “enterprise of one of the Contracting States” for the purposes of Art. 7.
At 344 their Honours said that “no element of repetition or system should be attributed to [the] expression” “enterprise of one of the Contracting States” by reference to the use of the words “carried on”: see also at 358-9. The partners of each of the RCF IV and RCF V partnership carried on an enterprise in that sense by their activities as partners in those partnerships. The relief from taxation provided by Article 7 extends to an “enterprise of a Contracting State”. The enterprise able to seek relief under Article 7 is the activity of the partners constituting the RCF IV and RCF V partnerships and, accordingly, the partners of each of the RCF IV and RCF V partnerships are able to claim relief under Article 7 of the United States Convention. Neither the RCF IV partnership nor the RCF V partnership is a separate taxable entity to be taxed separately from the partners and their agents. The taxable activity in each case was an investment in Talison Minerals and Talison Lithium which was carried out on their behalf by their respective General Partners.
58 The relief provided by the United States Convention was available to the partners in the partnerships who were resident in the United States. Article 3(1) defined an “enterprise of one of the Contracting States” to mean an enterprise carried on “by a resident of” either Australia or the United States, respectively, which in this case means those partners of each of RCF IV and RCF V partnerships who were residents of the United States, rather than any notional residence of the partnerships. The identification of those who are residents for the purposes of Article 7 is governed by Article 4 of the United States Convention which dealt with residence and provided as follows:
(1) For the purposes of this Convention:
(a) a person is a resident of Australia if the person is:
(i) an Australian corporation; or
(ii) any other person (except a company as defined under the law of Australia relating to Australian tax) who, under that law, is a resident of Australia,
provided that, in relation to any income, a person who:
(iii) is subject to Australian tax on income which is from sources in Australia; or
(iv) is a partnership, an estate of a deceased individual or a trust (other than a trust that is a provident, benefit, superannuation or retirement fund, or that is established for public charitable purposes or for the purpose of enabling scientific research to be conducted by or in conjunction with a public university or public hospital, the income of which is exempt from tax under the law of Australia relating to Australian tax),
shall not be treated as a resident of Australia except to the extent that the income is subject to Australian tax as the income of a resident, either in the hands of that person or in the hands of a partner or beneficiary, or, if that income is exempt from Australian tax, is so exempt solely because it is subject to United States tax; and
(b) a person is a resident of the United States if the person is:
(i) a United States corporation; or
(ii) a United States citizen, other than a United States citizen who is a resident of a State other than Australia for the purposes of a double tax agreement between that State and Australia; or
(iii) any other person (except a corporation or unincorporated entity treated as a corporation for United States tax purposes) resident in the United States for purposes of its tax, provided that, in relation to any income derived by a partnership, an estate of a deceased individual or a trust, such person shall not be treated as a resident of the United States except to the extent that the income is subject to United States tax as the income of a resident, either in its hands or in the hands of a partner or beneficiary, or, if that income is exempt from United States tax, is exempt other than because such person, partner or beneficiary is not a United States person according to United States law relating to United States tax.
(2) Where by application of paragraph (1) an individual is a resident of both Contracting States, he shall be deemed to be a resident of the State:
(a) in which he maintains his permanent home;
(b) if the provisions of sub-paragraph (a) do not apply, in which he has an habitual abode if he has his permanent home in both Contracting States or in neither of the Contracting States; or
(c) if the provisions of sub-paragraphs (a) and (b) do not apply, with which his personal and economic relations are closer if he has an habitual abode in both Contracting States or in neither of the Contracting States.
For the purposes of this paragraph, in determining an individual’s permanent home, regard shall be given to the place where the individual dwells with his family, and in determining the Contracting State with which an individual's personal and economic relations are closer, regard shall be given to his citizenship (if he is a citizen of one of the Contracting States).
(3) An individual who is deemed to be a resident of one of the Contracting States for any year of income, or taxable year, as the case may be by reason of the provisions of paragraph (2) shall, for all purposes of this Convention, be deemed to be a resident only of that State for such year.
Article 4(1)(a) identified when a person was a resident of Australia, whilst Article 4(1)(b) identified when a person was a resident of the United States. A person coming within the latter provision is entitled to the relief provided by Article 7 (subject to the exclusions found in, and through the operation of, Article 7). Article 4(1)(b)(iii) contemplates a resident of the United States being a person deriving income by a partnership.
59 Article 4 does not provide, and does not warrant a construction, that a partnership should be treated as a separate person with a separate residence. Article 3(1)(a) provides that “person” includes a partnership but the words “any other person” when used in Article 4(1)(b)(iii) do not create a category of taxable entities which is separate from the partners or agents through which the partners carry on an enterprise. The terms of Article 4(1)(b)(iii) do not suggest that a partnership was intended to be included as a person separate from, and in addition to, the partners who comprised it, and the proviso in Article 4(1)(b)(iii) would, in any event, exempt partnerships from the category of persons who are resident in the United States. That is because the article expressly excludes “such person” (that is, “a corporation or unincorporated entity treated as a corporation for United States tax purposes”) who “is not a United States person according to United States law relating to United States tax”.
60 The expert evidence of Ms Kuusisto was that under US Federal income tax law there is no concept of a partnership having a separate legal entity for United States tax. Ms Kuusisto explained:
3.2. Taxation of Income and U.S. Information Return Filing Obligations of each Fund.
(a) Under U.S. federal income tax rules, the Funds themselves are not subject to U.S. taxation at the entity level; rather, each Fund’s partners are subject to U.S. taxation as if they had realized directly their distributive share of such Fund’s items of income, gain, loss, deduction or credit.
i. A partnership as such is not subject to the income tax imposed by the income tax provisions of the Code. Persons carrying on business as partners are liable for income tax only in their separate or individual capacities.
ii. In general, each partner is required to take into account his or her distributive share (whether or not distributed) of the partnership’s items of income, gain, loss, deduction or credit.
iii. The character of any such item shall be determined “as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.
(b) Although it is the partners, not the partnership, who are subject to tax on partnership income, most partnerships, including the Funds (based on the U.S. Partner Assumption set forth below), are nonetheless required to file annual tax informational returns with the U.S. tax authorities.
i. I have been instructed to assume (the “U.S. Partner Assumption”) that each Fund (a) has at least one partner that is a U.S. “resident” - meaning an individual who is a U.S. citizen or resident alien or a corporation, trust or estate which is a U.S. person - (a “U.S. partner”) and (b) allocates more than 1% of items of partnership income, gain, loss, deductions or credit to such U.S. partner(s).
ii. Most partnerships, including the Funds based on the U.S. Partner Assumption and U.S.-Source Income Assumption set for the below, are obligated to (A) “make a return for each taxable year, stating specifically the items of its gross income and the deductions allowable” and (B) “include in [such] return the names and addresses of the individuals who would be entitled to share in the taxable income if distributed and the amount of the distributive share of each individual.”
(c) U.S. federal income tax rules applicable to partnerships do not use the concept of “residence” because partnerships are not liable as entities to pay U.S. federal income tax, but instead are treated as flow-through entities. Nonetheless, many foreign partnerships, including the Funds based on the U.S. Partner Assumption and U.S.-Source Income Assumption set forth below, are treated in the same manner as domestic partnerships and are obligated to file U.S. federal tax informational returns.
i. A foreign partnership that has gross income effectively connected with the conduct of a trade or business within the U.S. (“ECI”) or has gross income (including gains) derived from sources within the US (“U.S.-source income”) that is not ECI must file· a partnership return for its taxable year in accordance with the rules for domestic partnerships.
A. Capital gains are sourced at the residence of the “seller” which in the partnership context means the residence of its partners.
B. Based on the U.S. Partner Assumption, each of the Funds has partners that are U.S. residents and, accordingly, will have U.S.-source income in any year in which capital gains are realized from any source. U.S.-source income also results from dividends or interest realized from investments in the U.S.
(1) I have been instructed to assume (the “U.S.-Source Income Assumption”) that either capital gains or other U.S. source income items were realized by each of the Funds in each relevant year.
ii. A foreign partnership that has $20,000 or less of U.S.-source income and has no ECI during its taxable year is not required to file a partnership return if, at no time during the partnership taxable year, 1% or more of any item of partnership income, gain, loss, deduction or credit is allocable in the aggregate to U.S. partners.
A. Based on the U.S. Partner Assumption, each Fund allocates more than 1% of certain items of partnership income, gain, loss, deduction or credit to U.S. Partners.
iii. A foreign partnership that has U.S.-source income is not required to file a partnership return if the partnership has no ECI and no U.S. partners at any time during the partnership's taxable year, provided that the tax liability with respect to withholdable amounts has been fully satisfied by the withholding of tax at the source and certain other conditions are satisfied.
A. Based on the U.S. Partner Assumption, each of the Funds has U.S. partners.
iv. A foreign partnership with one or more U.S. partners that has U.S.-source income but no ECI must file a partnership return, unless clause ii above applies.
A. See above clauses i. and ii.
v. Based on the U.S. Partner Assumption, the U.S.-Source Income Assumption and as a consequence of the analysis set forth above, I can say that each Fund is treated in substance in the same manner as a partnership established in the U.S. for U.S. federal tax reporting, entity classification and flow-through taxation purposes.
The expert evidence of Mr Heaver-Wren was to like effect in relation to Cayman Islands’ law, that is, that an exempted limited partnership formed under the ELP Law was not treated as a separate legal person or separate taxable entity.
61 Mr Dolan, as mentioned above, had explained that a reason for establishing the RCF IV and RCF V partnerships as limited partnerships in the Cayman Islands was to preserve the position obtaining under US law of the imposition of tax falling upon the partners rather than upon a separate entity. Partners under US tax laws are commonly referred to, and are treated for US tax law purposes as, “look through entities”, because, like the view adopted in Australia in Tikva, a partnership is not treated for US tax purposes as a separate taxable entity as distinct from the partners who comprise it. That is neither surprising nor contrary to fiscal policy because the essence of a partnership, in contrast to a corporation, is that the individual members constituting the partnership are those acting in association as partners. The law thus treats the individual members of the partnership as those who are acting in law, with the consequence that tax law and tax policy attributes directly to them individually the fiscal consequences of their activities which were undertaken by them in association.
62 The definition of “person” in Article 3(1)(a) ensures that the provisions apply to the activities carried on by partners in a partnership but does not require that the words “any other person” in Article 4(1)(b)(ii) be understood to give to the partnership a residence separate from the partners. That construction is supported by the proviso in Article 4(1)(b)(iii) which makes clear that persons resident in the United States for the purposes of its tax are encompassed within the phrase “any other person” to the extent that such a person derives income through a partnership. The proviso expressly excludes “such persons” from the class of United States residents except to the extent that the income is subject to tax in the United States as income of a resident in the manner specified. The reference to “such person” in the proviso is to a category of person dealt with by the whole of Article 4(1)(b)(iii), which refers to the “any other person” appearing in the beginning of that clause. It follows that the partners of the RCF IV and RCF V partnership are entitled to relief under Article 7(1) of the United States Convention for the gains made upon the disposal of their shares and interests in Talison Minerals unless those business profits were excluded from Article 7(1) by Article 7(6). Whether the profit on disposal comes within Article 13(1), and whether it is therefore excluded from Article 7(1) by Article 7(6), will be considered below. For the present it is sufficient to note that the proceeds from the disposal by the partnerships were business profits within the meaning of Article 7(1) and that the partners of the partnerships would be entitled to relief from liability by reason of Article 7(1) unless excluded by Article 7(6).
63 This construction is supported also by a United States Treasury Department Technical Explanation of the Convention. Article 31 of the Vienna Convention on the Law of Treaties requires a treaty to be interpreted in “good faith in accordance with the ordinary meaning to be given to the terms of the Convention in their context and in the light of its object and purpose”. Recourse may be had to supplementary means of interpretation to confirm the meaning resulting from the application of Article 31 or to determine the meaning when the interpretation according to Article 31 leaves the meaning ambiguous or obscure or leads to a result which is manifestly absurd or unreasonable: see Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338, 344, 349-350, 356-7; Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149, -. The United States Treasury Department Technical Explanation of the Convention explained the residence provision in Article 4(b) as follows:
Subparagraph (b) provides that a resident of the United States means a US corporation and any other person resident in the United States for the purposes of its tax. However, a partnership, estate or trust is a resident of the United States for purposes of the Convention only to the extent that the income it derives either is subject to US tax as the income of a resident (either at the level of the entity or in the hands of a partner or beneficiary), or is exempt from US tax for reasons other than the recipient’s not being a US person.
The limitation of residency in this technical explanation to a partnership confines its application to the extent that the income derived is subject to US tax. That would be so when, as the explanation contemplates, it is taxable “in the hands of a partner”.
64 A general approach in the United States Convention of treating a partnership as fiscally transparent may also be seen in Article 7(9) which was introduced by protocol in 2001. Article 7(9) provides:
(a) a resident of one of the Contracting States is beneficially entitled, whether directly or through one or more interposed fiscally transparent entities, to a share of the business profits of an enterprise carried on in the other Contracting State by the fiscally transparent entity (or, in the case of a trust, by the trustee of the trust estate); and
(b) in relation to that enterprise, that fiscally transparent entity (or trustee) would, in accordance with the principles of Article 5 (Permanent Establishment), have a permanent establishment in that other State, that enterprise carried on by that fiscally transparent entity (or trustee) shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated in that other State and that share of business profits shall be attributed to that permanent establishment.
This Article is concerned with residence where a business is carried on through a permanent establishment and, therefore, does not directly deal with the issue in dispute between the Commissioner and the partners of RCF IV and RCF V. It proceeds on the general assumption, however, that a partnership is to be treated as a fiscally transparent entity in the sense that the residence that would be that of a partnership if it were a separate entity is deemed to be that of the partners: see also C. Garbarino Judicial Interpretation of Tax Treaties, [2.14].
65 The tax treatment contended for by the partners of the RCF IV and RCF V partnerships in these proceedings was also the way the Commissioner had ruled on the issue in tax determination TD2011/25 upon which the applicants also rely in these proceedings. The question which had been raised for determination in the Ruling was whether Article 7 of Australia’s tax treaties applied to Australian sourced business profits from a foreign limited partnership where the limited partnership was treated as fiscally transparent in a country with which Australia had entered into a tax treaty and the partners of the limited partnership were residents of that tax treaty country. That question is in all relevant respects the same as the issue raised in these proceedings by the partners in RCF IV and RCF V. The answer given by the Commissioner to that question in the Ruling was “yes”, but that answer is contrary to the Commissioner’s submissions in RCF III and to those in these proceedings; and it is also contrary to the basis of the assessments in these proceedings and of those in RCF III.
66 Section 357-60 of Schedule 1 to the Administration Act sets out when rulings are binding on the Commissioner and provides that, when rulings are binding on the Commissioner, the Ruling will bind the Commissioner in relation to a taxpayer if the Ruling applies to the taxpayer, and if the taxpayer relied on the Ruling by acting in accordance with the Ruling. In CTC Resources NL v Federal Commissioner of Taxation (1994) 48 FCR 397 Gummow J explained at 402 that when a ruling is applied the Ruling is “treated as the factum upon which the legislation” operates thereby modifying the operation of the general law.
67 Whether the Commissioner was bound by the Ruling arose as an issue in RCF III but was not considered by the Full Court. In RCF III it had been contended on appeal that the Ruling had been relied upon but the Full Court did not consider that question because the Full Court considered that the RCF III partnership was governed by Article 13 rather than by Article 7 and that the Ruling was not concerned with the application of Article 13. At  the Full Court said:
35 In any event, it is unnecessary to decide whether there was reliance for the purposes of s 357-60(1) because TD 2011/25 does not deal with the taxing position where the item of income is dealt with under another article of the DTA and is taken out of Article 7 by virtue of Article 7(6) of the DTA. Specifically, the TD says nothing about taxing rights in relation to gains dealt with under Article 13. The TD cannot bind the Commissioner concerning the application of Article 13 to the taxation of the gain.
The decision of the Full Court that the Ruling was not concerned with the application of Article 13 leaves open for consideration in the present proceedings whether the Ruling binds the Commissioner to apply Article 7 if relied upon. For present purposes the question is not whether Article 13 applies but whether the Commissioner is bound by the Ruling to apply Article 7 in the way ruled by the Commissioner.
68 Extensive unchallenged evidence was filed in these proceedings of reliance by the RCF IV and RCF V partnerships upon the Commissioner’s Ruling. Mr Hills gave evidence that a live issue for those connected with each of the Resource Capital Funds was, unsurprisingly, the question of the entitlement to relief under Article 7 of the United States Convention of the partners of the respective partnerships who were residents in the United States. That is not surprising because significant funds were being raised from US investors whose economic returns from participation in those investments would be affected by the way in which the RCF partnerships would be taxed in Australia: see Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404, 415-6. Mr Hills was an employee of RCF Management at the time of giving evidence on affidavit in the proceedings. He had been employed by RCF Management (Aust) from 1 August 2006 to 20 June 2012 with the title of “Vice President-Legal”. He became an employee from 20 June 2012 of RCF Management, which was RCF Management (Aust)’s parent, and he had been a solicitor in private practice in Western Australia before his involvement with RCF Management (Aust). Part of his responsibilities with RCF Management (Aust) included advising each of the RCF partnerships in relation to Australian taxation matters, and in that context he took an interest in a draft determination by the Commissioner which confirmed the views ultimately adopted by the Commissioner in the Ruling; namely, that the tax office would grant treaty relief, subject to the terms of Article 7, to US resident partners of the various RCF limited partnerships established under Cayman Islands’ law.
69 Mr Hills exhibited to his affidavit emails dating from 29 November 2010 in which he sought advice and information from KPMG in Perth about how the Commissioner would treat the partners in the RCF partnerships. That is not surprising because the RCF funds were structured in line with the United States Convention to meet US tax treatment of taxing the partners rather than of taxing the partnerships as separate entities. Substantial funds had been raised by the Resource Capital Funds which had been formed over the years, and knowing how those involved would be taxed in Australia by the Commissioner was important to the economic returns in the context of cross-border transactions. RCF I had been formed in May 1998, RCF II in March 2000, and RCF III in February 2003. The Private Placement Memorandum for RCF V tendered in the proceedings by the Commissioner recorded RCF’s historical performance in the mining sector as follows:
RCF has extensive investment experience in the mining sector, having provided financial support to nearly 80 mining companies involving projects located in 30 different countries and relating to 28 different commodities. Members of the Management Team have held more than 35 board positions, and RCF’s portfolio companies have been listed on eight different stock exchanges worldwide.
Mr Opie, a tax partner at KPMG in Perth, had informed Mr Hills of the draft tax determination which had raised squarely the Commissioner’s application of the business profits article to Australian sourced business profits of a foreign limited liability partnership where the partners were residents of a country with which Australia had a treaty in which the limited liability partnership was treated as fiscally transparent in the country of residence of the partners.
70 On 1 December 2010 Mr Hills received further emails from Mr Opie in which Mr Hills was advised that the Commissioner had issued certain final taxation determinations and two new draft determinations affecting investment in Australia by both resident and non-resident private equity. The email enclosed a KPMG document entitled “Tax in Focus Private Equity Determinations – New Tax Governance Model for Private Equity”. The view expressed by KPMG in the executive summary included the following statement about how the Commissioner would treat partnerships like RCF IV and RCF V:
The ATO has determined it will look through limited partnership fund structures and exempt limited partners from Australian tax where they are resident in a country in which Australia has a double tax agreement. This is a major breakthrough for the global PE industry and a welcome departure from previous ATO practice in this area.
Mr Hills sought other sources of information of the Commissioner’s view and was aware of the process of the draft ruling leading to its finalisation. He became aware that Mr Philip Bisset, a partner at Clayton Utz solicitors, had been involved in dealings with the Commissioner in relation to the finalisation of the draft ruling, and obtained Mr Bisset’s assistance on behalf of RCF and its partners in relation to the position to be taken by the Commissioner in relation to the application of the United States Convention to the partners of RCF IV and RCF V.
71 One of the practical issues relating to the application of the treaty was how to determine the residence of the partners seeking to claim relief under the United States Convention. Mr Hills took an interest throughout 2011 in Mr Bisset’s involvement with the Commissioner to resolve the “practical difficulties” of establishing the residence of the ultimate partners in a limited partnership which were referred to in the draft ruling. Part of the assistance given by Mr Bisset in relation to the draft ruling was to engage Ms Kuusisto to provide an opinion that various United States tax forms (known as “W” forms) could, and should, be relied upon to establish the residency of the ultimate partners in a limited partnership. On 26 October 2011 Mr Hills received an email from Mr Bisset attaching a link to the final version of draft tax determination TD2010/D8 which was issued on that day as TD2011/25. The following day Mr Hills sent an email to Mr Bisset noting that the final version did not seem to have changed much but that the Ruling had “been very clear to narrow [the] scope of art 7” and had “confirmed tracing through transparent entities to [the] ultimate tax payer”. Thereafter Mr Hills took steps to be able to identify, and to satisfy the ATO about, which partners in the various RCF partnerships were resident in the United States. Mr Hills stated in his affidavit that he regarded this as being “important as once we were satisfied which partners were resident in the US we would know which partners would be entitled to treaty relief under the determination”.
72 In 2010 there were three RCF partnerships which held interests in companies which operated in Australia. In April 2012 Mr Hills became aware that the Commissioner’s office was conducting a “comprehensive review” into transactions involving takeovers and mergers in companies in Australia, particularly in relation to the tax effect of foreign entities holding substantial shareholdings in Australian companies. In October 2012 he received an email from Mr Bisset attaching an email he had received that morning from Mr Steve Vincent of the ATO. The email from Mr Vincent had indicated that the review was seeking a general understanding of the tax implications of the disposal of shares in QMAG Limited, but advised that Australia “would not impose tax on those profits to the extent that the limited partners, or ultimate limited partners where the limited partner is itself another fiscally transparent entity, is resident of a tax country (as per TD2001/25)”. The reference to TD2001/25 was correctly understood as being to TD2011/25 although the year of the Ruling had been incorrectly typed as 2001 rather than 2011. There was no suggestion of any other Ruling numbered TD2001/25 being otherwise relevant.
73 Amongst the steps subsequently taken by Mr Hills was to establish the identity of the partners who were residents of the United States to ensure their entitlement to treaty relief under, and subject to, the terms of Article 7 of the United States Convention. To achieve that objective he took steps to obtain “from each partner details which would satisfy the general partner of each partnership, and which would satisfy the ATO, that each partner was a resident in the USA”. In unchallenged evidence Mr Hills said in his affidavit:
All of these steps were taken based on the view expressed in the ruling that partners in fiscally transparent partnerships would be entitled to treaty relief under Article 7 of the US/Australia Double Tax Agreement or its equivalent in other treaties if the partner was a resident of the country with which Australia had a double tax agreement.
Steps were subsequently taken through Ms Croasdale to obtain from each of the partners the relevant US forms to prove residency of each of the partners. Ms Croasdale provided a draft letter to be sent by email to each of the partners which was approved by Mr Hills. The Investment Committee which decided to sell the shares in Talison Lithium was informed of the Ruling. Mr Hills recalled being invited to attend an ad hoc meeting of the Investment Committee which was held on 25 July 2012 in Denver at which he was asked a specific question about the likely tax outcome of the proposed sale from an Australian tax perspective. He informed the members of the committee, amongst other matters, about the application and effect of the United States Convention, and of the Ruling, to the proposed transaction, namely, that Article 7 of the United States Convention would apply to the Talison transaction for the benefit of the limited partners.
74 Taxation Ruling TD2011/25 is in the following terms:
Income tax: does the business profits article (Article 7) of Australia’s tax treaties apply to Australian sourced business profits of a foreign limited partnership (LP) where the LP is treated as fiscally transparent in a country with which Australia has entered into a tax treaty (tax treaty country) and the partners in the LP are residents of that tax treaty country?
1. Yes, to the extent the business profits are treated as the profits of the partners (and not the LP) for the purposes of the taxation laws of the country of residence of the partners; the profits are not dealt with under another Article of the Treaty (such as Article 13); and the resident partners meet any other applicable tax treaty requirements.
2. The Article will also apply to the extent that a partner in a LP is itself a LP and its partners (the ultimate partners) are residents of a tax treaty country.
3. A reference in this Determination to a limited partnership (LP) includes a reference to an entity that is not a resident of Australia and satisfies the definition of limited partnership in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
4. The term ‘ultimate partner’ in this Determination means a tax treaty country resident with an indirect interest in the LP which derives the Australian sourced business profit. The indirect interest is held via an interposed LP.
5. This Determination does not apply where the fiscally transparent entity is not a partnership.
6. Cayman LP is a limited partnership formed in the Cayman Islands. The limited partners in Cayman LP are resident in a tax treaty country. The general partner of Cayman LP is a private equity firm and is also resident for tax purposes in the treaty country.
7. For that country’s tax purposes, Cayman LP is treated as fiscally transparent, such that the profits derived by Cayman LP are treated as the profits of the resident partners, to the extent of their interest in Cayman LP. Cayman LP is also a ‘corporate limited partnership’ within the meaning of that term in section 94D of the Income Tax Assessment Act 1936 (ITAA 1936) and is therefore treated as a company for Australian tax law purposes. Cayman LP is not treated as an Australian resident under section 94T of the ITAA 1936.
8. Cayman LP acquires all of the shares in Target Co, an Australian manufacturing company. The primary purpose of the partners in Cayman LP for acquiring Target Co is to improve its business operations in the short term and then sell Target Co via an initial public offering for an amount greater than the purchase price. This activity is undertaken through an independent agent acting as such in Australia in the ordinary course of its business. Cayman LP derives profits from the sale of Target Co at a price higher than that for which it was acquired. These profits are Australian-sourced and are not attributable to a permanent establishment in Australia.
9. Article 7 of the relevant tax treaty prevents Australia from imposing tax on profits of an enterprise of the other country unless such profits are attributable to a permanent establishment in Australia. Although the profits in this example are derived by Cayman LP, these profits are treated as the profits of the limited partners under their home country’s tax law and are not taxed in the Cayman Islands. The profits of Cayman LP will not be subject to tax in Australia to the extent the profits are treated as the profits of the limited partners in the treaty country.
10. The facts are as above in Example 1 with the following additions:
• A limited partner in Cayman LP is another limited partnership formed in the Cayman Islands (Interposed LP);
• There are two limited partners in Interposed LP. One limited partner is a resident of a tax treaty country; the other is not a resident of a tax treaty country;
• In the Cayman Islands and the tax treaty country, neither Cayman LP nor Interposed LP are treated as taxable entities. Rather, the profits are treated as the profits of the limited partners; and
• Interposed LP does nothing more than distribute the profits it receives from Cayman LP to the limited partners.
11. In respect of the limited partner of Interposed LP resident in a tax treaty country, the result as outlined in example 1 applies. Thus, to the extent the profits derived by Cayman LP are treated as the profits of that limited partner, Article 7 will apply and Australia will not tax those profits provided the Commissioner is satisfied as to residence and other applicable treaty requirements.
12. In respect of the profits derived by Cayman LP that are treated as the profits of the limited partner not resident in a tax treaty country, Australian tax will be imposed.
13. The facts are the same as in example 2 except that the limited partner resident in the tax treaty country is a tax exempt organisation that qualifies as a resident for the purposes of the relevant tax treaty. To the extent the profit is treated as the profit of the tax exempt organisation, Australian tax will not be imposed. Again, the Commissioner must be satisfied that the profit is treated as the profit of a tax treaty country resident and any other applicable treaty requirements must be met.
Date of effect
14. This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
The Ruling contains an explanation as an appendix which is said to be “not legally binding” which supports the construction of the Ruling maintained on behalf of the partners of RCF IV and RCF V. However, the question, the answer, and the terms of the Ruling, and also the examples given in the Ruling, are sufficient to bind the Commissioner in relation to the partners of the RCF IV partnership and of the RCF V partnership. Example 1 in the Ruling is the same as the circumstances of RCF IV where a Cayman Islands limited partnership is a limited partnership formed in the Cayman Islands, the limited partner is a resident in a tax treaty country, and the General Partner of the Cayman Islands limited partnership is a private equity firm and is also a resident for tax purposes in the treaty country. The circumstances of RCF V are materially the same.
75 It follows that the Ruling would apply on its terms to bind the Commissioner in relation to the partners of the RCF IV and RCF V partnerships. The Ruling would also bind the Commissioner in relation to RCF IV and RCF V upon the footing accepted in RCF III that RCF IV and RCF V were separate taxable entities but for the conclusion at  in RCF III that Article 13, and not Article 7, applied in the facts of that case. The Full Court in RCF III did not decide whether there had been reliance upon TD 2011/25 because it had formed the view that TD 2011/25 did not deal with the circumstance of an item of income having been taken out of Article 7 by Article 7(6). The view taken by the Full Court in RCF III therefore did not call for it to consider whether the partners in RCF III had relied upon TD 2011/25 in relation to how the Commissioner would apply Article 7. The issue in this context for the present is not whether the income of the partners in RCF IV and RCF V was taken out of Article 7 by Article 7(6) but, rather, whether in the present proceeding there had been established reliance by the partners of RCF IV and RCF V partnerships about how the Commissioner was to apply Article 7 to them. Accepting that TD 2011/25 says nothing about the taxing rights in relation to gains under Article 13 does not prevent reliance by the applicants on the Commissioner’s ruling on how the Commissioner would apply Article 7, to the extent applicable, to the partners of RCF IV and RCF V partnerships. It is sufficient for the present to conclude that there has been established reliance by the applicants that the Commissioner would apply Article 7 to the partners directly. It follows that the Ruling in TD2011/25 binds the way in which the Commissioner is to apply the legislation, namely, to grant relief under Article 7 of the United States Convention to the partners of the RCF IV and RCF V partnerships unless the profit from the disposal of the shares and interests is to be assessed under Article 13 by reason of Article 7(6). That may seem to be, and may be, a curiously narrow construction of a Ruling which was intended to have broad application to an important commercial cross-border transaction involving the raising and investment of substantial sums of money, but it is consistent with the terms of the Ruling and with the decision in RCF III. It becomes necessary to consider, therefore, whether the profits in question were excluded from the relief given by Article 7(1) and by the Ruling as construed.
76 Article 7(1) is excluded by Article 7(6) where business profits otherwise within Article 7(1) include “items of income which are dealt with separately in other Articles” of the United States Convention. Article 7(6) expressly provides that the provisions of those other articles are then not affected by the provision of Article 7. In this case the Commissioner relied upon Article 13, which permits Australia to tax the residents of the United States on income or gains from the alienation or disposal of real property situated in Australia. Article 13 does not directly impose tax but permits tax to be imposed by Australia pursuant to its terms. The Commissioner’s assessments under Division 855 of the 1997 Act upon RCF IV and RCF V were submitted to be permitted by Article 13.
77 Article 13 deals with the taxation of gains made from the alienation or disposal of real property and provides that they may be taxed by the country in which the property was situated. In this case the partners in the RCF IV and the RCF V partnerships disposed of the shares and interests in Talison Lithium rather than of real property, but the shares were in a company which held real property. The corporate structure of Talison Lithium as at March 2013, immediately before the scheme of arrangement became effective, may be shown diagrammatically as follows:
Immediately before the scheme of arrangement became effective Talison Lithium held shares in Talison Minerals which itself held shares in Talison Services Pty Ltd and TLA. The latter, rather than Talison Lithium or Talison Minerals, held mining leases, but the Commissioner contended that the disposal of the shares in Talison Lithium came within the extended operation of Article 13. The appellants, in contrast, contended that Article 13 could have no operation to the disposal by the partners of RCF IV and RCF V.
78 The application of Article 13(1) to the applicants, and its relationship to Division 855 of the 1997 Act, raises many complex questions of fact and legal construction. One of them is how to determine whether Division 855 of the 1997 Act is authorised by Article 13 (in light of Article 7). Less attention may have been given in the parties’ submission to that question of construction than may have been desirable, but the better view is that Division 855 is permitted within the terms of Article 13(1) notwithstanding that different terms are used in Division 855 to achieve the imposition of tax permitted to Australia by Article 13(1).
79 Article 13(1) permits Australia to impose taxes upon the income or gains derived by the residents of the United States from the alienation or disposition of real property in the following terms:
Income or gains derived by a resident of one of the Contracting States from the alienation or disposition of real property situated in the other Contracting State may be taxed in that other State.
The term “real property situated in the other Contracting State”, as used in Article 13(1), has the meaning given to it by Article 13(2) where, in the case of real property situated in the United States, it is defined to include “real property interest, and real property referred to in Article 6 which is situated in the United States”. Where the real property is situated in Australia, the term is defined by Article 13(2)(b) as follows:
(b) the term “real property”, in the case of Australia, shall have the meaning which it has under the laws in force from time to time in Australia and, without limiting the foregoing, includes:
(i) real property referred to in Article 6;
(ii) shares or comparable interests in a company, the assets of which consist wholly or principally of real property situated in Australia; and
(iii) an interest in a partnership, trust or estate of a deceased individual, the assets of which consist wholly or principally of real property situated in Australia.
One of the issues in contest between the parties was whether the disposal of the Talison Lithium shares was a disposal of shares or comparable interest in a company the assets of which consisted wholly or principally of real property situated in Australia within the meaning of Article 13(2)(b)(ii). An issue in that contest was whether the real property referred to in Article 6, and referred to expressly in Article 13(2)(b)(i), was also to be understood as included in the expression “real property” where appearing in Article 13(2)(b)(ii).
80 The meaning of the term “real property” in Article 13(2)(b)(ii) is not without difficulty. There is much to be said for the construction advanced for the applicants that the meaning of “real property” in Article 13(2)(b)(ii) is not to be understood to incorporate the extended meaning given either directly by Article 6(2) or indirectly by Article 13(2)(b)(ii). Article 13 has a specific definition of “real property” “for the purposes of” Article 13, and the extended meaning given to “real property” by Article 13(2)(b)(ii) does not expressly incorporate or expressly refer to the extended definition of “real property” in Article 6(2). On one view, the incorporation of the meaning of real property in Article 6 by its specific reference in Article 13(2)(b)(i) might be thought to militate against a construction that its meaning in Article 13 would otherwise have included the broader meaning given to it by Article 6(2). Article 6 deals with the taxation of income from real property and the extended meaning of “real property” in Article 6(2) for the purposes of the United States Convention might require a construction that does not unduly impact upon the balance of taxing rights which is struck by the other provisions. On the other hand, Article 6(2) provides for an extended meaning of “real property” for the purposes of the United States Convention as a whole without exclusion or qualification.
81 Article 6(1) is expressed to deal with income from “real property” generally and the terms of Article 6(2) is expressed to apply widely and without restriction or exclusion. Article 6(2) provides:
(2) For the purposes of this Convention:
(i) a leasehold interest in land, whether or not improved, shall be regarded as real property situated where the land to which the interest relates is situated; and
(ii) rights to exploit or to explore for natural resources shall be regarded as real property situated where the natural resources are situated or sought.
A word or term may be used in different senses and its defined meaning for one purpose may not govern its meaning in another place or context: see Federal Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) (2015) 326 ALR 590 at . However, Article 13 does not require that the extended meaning given to real property in Article 6 be excluded from the use of the term “real property” when used in Article 13(2)(b)(ii). The extended meaning of real property to include “rights to exploit or to explore for natural resources” would not otherwise come within the contemplation of real property under the laws of Australia: see TEC Desert Pty Ltd v Commissioner of State Revenue (WA) (2010) 241 CLR 576. For meaning to be given to the expression “real property” in the context of Article 13 it must be intended to encompass real property as contemplated by Article 6, and the language of Article 6(2) incorporates directly the meaning of the words “real property” in Article 13(2)(b)(ii). Rights to explore for, and to exploit for, natural resources are deemed by Article 13(2)(b)(i) to be real property for the purposes of Article 13 if the rights are held by a taxpayer, and those rights are deemed by the terms of Article 6(2) to be real property where the relevant assets held by the taxpayer are shares in a company.
82 The inclusion of the wider meaning of real property from Article 6 in the terms of Article 13(2)(b)(ii), however, does not necessarily result in the application of Article 13 to RCF IV and RCF V. That is because the partners in those partnerships were disposing of shares and interests in a company which in turn held shares in other companies rather than disposing of leasehold interest in land or rights to exploit, or to explore for, natural resources. The extent to which an extended meaning of Article 13 applied to successive levels in a corporate structure was considered by the Full Court in Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597. That case was concerned with the corresponding agreement between Australia and the Netherlands (“the Dutch Convention”) which had contained a provision in Article 13 with an extended definition of real property.
83 The question posed for the Court’s decision in Lamesa, together with the terms of the relevant provisions of Article 13 of the Dutch Convention, were set out at 601-2 of the Court’s decision in Lamesa as follows:
The question that arises therefore, is whether the profits fall within Art 13 so as to be excluded from Art 7. Art 13 provides as follows:
“(1) Income from the alienation of real property may be taxed in the State in which that property is situated.
(2) For the purposes of this Article -
(a) the term 'real property' shall include -
(i) a lease of land or any direct interest in or over land;
(ii) rights to exploit, or to explore for, natural resources; and
(iii) shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the States or of rights to exploit, or to explore for, natural resources in one of the States.
(b) real property shall be deemed to be situated -
(i) where it consists of direct interests in or over land - in the State in which the land is situated;
(ii) where it consists of rights to exploit, or to explore for, natural resources - in the State in which the natural resources are situated or the expiration may take place; and
(iii) where it consists of shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the States, or of rights to exploit, or to explore for, natural resources in one of the States - in the State in which the assets or the principal assets of the company are situated.
(3) Gains from the alienation of shares or ‘jouissance’ rights in a company the capital of which is wholly or partly divided into shares and which is a resident of the Netherlands for the purposes of Netherlands tax, derived by an individual who is a resident of Australia, may be taxed in the Netherlands.”
In that case the Court held that the application of Article 13 did not apply to assimilate the assets of one company with the assets of another company. At 608 the Court said:
It seems to us quite consistent with rational policy that the Agreement was intended to assimilate as realty only one tier of companies rather than numerous tiers. Separate legal personalty is a doctrine running not only through the common law but the civil law as well. No suggestion is made to the contrary. That is consistent with the plain and quite unambiguous language which the Agreement has employed. When legislation speaks of the assets of one company it invariably does not intend to include within the meaning of that expression assets belonging to another company, whether or not held in the same ownership group.
The Court explained at 606 that shares in a company are personalty and that the Dutch Convention generally left profits from the alienation of shares to be dealt with in accordance with Article 7 in the context of an enterprise. The Court observed at 606-7 that those framing the agreement (which is relevantly equivalent to the United States Convention) had chosen to assimilate in limited circumstances shares or comparable interests of the kind ascribed to real property. Such assimilation “could only arise by the specific provision” of the agreement, and the alienation by the partners of RCF IV and RCF V of the shares in Talison Minerals would not come within the terms of Article 13 consistently with the reasoning in Lamesa.
84 The terms of Article 13 must, however, be read in light of s 3A of the Agreements Act which was introduced following the decision in Lamesa. Section 3A(2) extended the operation of provisions such as Article 13 to the alienation or disposition of shares or comparable interest in companies where the value of the assets of the shares is attributable to real property or interests through one or more interposed companies or other entities. Section 3A(2) provides:
(2) For the purposes of this Act, that provision is taken to extend to the alienation or disposition of shares or any other interests in companies, and in any other entities, the value of whose assets is wholly or principally attributable, whether directly, or indirectly through one or more interposed companies or other entities, to such real property or interests.
The ambit of application of this provision is governed by s 3A(1) which provides:
(1) This section applies if:
(a) an agreement makes provision in relation to income, profits or gains from the alienation or disposition of shares or comparable interests in companies, or of interests in other entities, whose assets consist wholly or principally of real property (within the meaning of the agreement) or other interests in relation to land; and
(b) this Act gave that provision the force of law before 27 April 1998.
The Explanatory Memorandum accompanying the Taxation Laws Amendment Bill (No. 11) 1999, which introduced s 3A, explained at [1.10] that the section was intended to provide for a wide examination of the assets held by entities for the purpose of determining whether their value was wholly or principally attributable to real property without being limited by the “corporate veil”.
85 It was submitted for the applicants that s 3A of the Agreements Act should nonetheless not be construed to override Article 13 of the United States Convention. The principles applicable to the construction of treaties was considered by the High Court in Thiel, and more recently in Macoun v Commissioner of Taxation (2015) 257 CLR 519, where it was said in the joint judgment of the Court at -:
 The applicable principles of construction are not in dispute. The meaning of the Agencies Convention is to be construed according to the rules of construction in the Vienna Convention. Article 31(1) provides that a treaty must be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”.
 Article 31(2) of the Vienna Convention states:
The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty;
(b) any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
 Article 31(3) provides that, together with the context, the following is also to be considered:
(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) any relevant rules of international law applicable in the relations between the parties.
 Finally, reference should be made to Art 32 of the Vienna Convention, which provides that recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Art 31 or to determine the meaning when the interpretation according to Art 31 is ambiguous or obscure or leads to a result that is manifestly absurd or unreasonable.
Although the terms of a treaty are to be interpreted in good faith, its terms cannot prevail if the terms of an Act overrides those of a treaty, and where that is so, the terms of the Act must prevail over those of a treaty if the terms of the Act so require: see Polites v Commonwealth (1945) 70 CLR 60; Meyer Heine Pty Ltd v China Navigation Co Ltd (1966) 115 CLR 10; Riley v Commonwealth (1985) 159 CLR 1. The issue of construction in the present case might more accurately be described as requiring the reconciliation of two domestic laws, namely, the domestic effect of the provision of a treaty which is given legislative effect by the Agreements Act with another provision of that Act. The United States Convention, like any international instrument, does not have the force of law in Australia except to the extent that it is incorporated into domestic law by statute (see Minister for Immigration and Ethnic Affairs v Teoh (1995) 183 CLR 273 at 286-287) but the United States Convention is given the force and effect of domestic law. The United States Convention must, therefore, be applied as part of Australian domestic law which relevantly includes s 3A of the Agreements Act that requires Article 13 to be applied in the manner contemplated by s 3A(2): see Polites v Commonwealth (1945) 70 CLR 60 at 69. The effect and intent of s 3A of the Agreements Act in this case are clear and apply to extend the construction and operation of Article 13 of the United States Convention to the alienation or disposal of real property indirectly by the partners of RCV IV and RCF V by their disposal of shares.
86 The applicants next submitted that it became necessary to consider, for the application of s 3A(2), whether the value of the assets was wholly or principally attributable to the real property understood in the extended sense provided by the section. It was submitted that s 3A(2) extended the operation of a provision in the United States Convention in a particular way but was not otherwise intended to undermine the balance struck by the other terms of the international agreement made between the United States and Australia (cf Lamesa at 603-4). In other words that s 3A was intended to assimilate the underlying value of real property held through shares with the value of the shares that were alienated or disposed to the extent that the value of the assets was “wholly or principally attributable” to the real property, but that the assessing provisions of Division 855 went beyond what s 3A(2) permitted.
87 It was submitted for the applicants, in this context, that it was “simply impossible […] to say that the value of the Talison Lithium shares [was] principally attributable” to real property or interests. Senior counsel for the applicants submitted:
Your Honour will see what the section does, and it introduces yet another test, and your Honour will see that in 3A, subsection (2), which is, for the purpose of this Act – that’s the International Agreements Act – that provision – that’s, effectively, the article 13 provision – is taken to extend to the alienation or disposition of shares or any other interest in companies and in any other entities the value of whose assets is wholly or principally attributable, whether directly or indirectly, through one or more interposed companies to such real property interests.
Now, the real property interests are the real property interests as defined in the agreement. So we say that when you get to shares in a company it’s real real property. So all that this does – it doesn’t change the definition of real property, but seeks to allow one to go down or up, however you look at the diagram, through a number of subsidiaries, but introduced as a new test ..... a test that requires one to determine whether the value of the company – so this is in our case Talison Minerals, so we’re disposing of shares in – sorry, this is Talison Lithium. We’re disposing of shares in Talison Lithium, and the question then is, for the purposes of 3A, whether the value of the assets of Talison Lithium, that is, its various assets in its shareholding, are wholly or principally attributable and directly or indirectly relates to the number of companies to such real property or interests.
Now, the test of value being attributable to is a wholly different test, and no one is pretending any of this is easy, but it’s not like division 855 where there are a clear set of rules. There is a general concept of wholly or principally attributable to, and “wholly or principally attributable to” is an interesting phrase. We know what “wholly” means, but we submit that the phrase “wholly or principally attributable to” has a quantitative and a qualitative attribute. And so when one gets to a case like this, one has to be able to say, assuming 3A applies, and I will come back to why it may not apply, but one has to not only look at underlying assets and then come to this conclusion, what is the meaning of real property in a company a whole lot of layers down, but one has to work out whether the value of the shares that Talison Lithium owns is wholly or principally attributable to real property interests.
Whatever that might mean. And that, in the present case, is a very difficult issue. It may not be a difficult issue if there’s a chain of companies and down the line there’s blackacre and whiteacre, and you can send a valuer in to value them, and they’re the only assets or the principal assets, but in a case such as the present, where again, you’ve got this complex set of sophisticated mining and processing operations producing very valuable chemicals and you ask the question what is the value of the shares that Talison Lithium owns principally attributable to? Now, the valuers, including Mr Samuel – and Mr Samuel, in particular, agreed with this, that in determining the value of shares or determining the value of an asset, what one principally looks at is the cash flow that’s generated, and one discounts that to work out a net present value.
And if one does that in this case, the only relevant cash flow is the cash flow obtained by the sale, or obtained from the sale of the chemicals at the end of the day, so we know that those chemicals wouldn’t be produced if the ore hadn’t been mined. We know that those chemicals wouldn’t have been produced if the plant and equipment wasn’t there. We know those chemicals wouldn’t be produced if the general purpose wasn’t there. We know they wouldn’t be produced if there wasn’t the workforce and all that sort of thing. We know the price wouldn’t be obtained if there wasn’t a massive demand for lithium, so there are a whole lot of factors that go there.
But to say that that cash flow that’s generated from the whole operations is wholly or principally attributable to one asset in the present case is totally unrealistic when one has got an integrated set of operations, so we keep finding in this string of legislation, deeming on deeming in article 13, and then some further deeming through this treaty override in article 3(a), which then introduces a new concept. So there’s two concepts. One, you look at value of assets, but here, you’ve got to have the value of the shares that Talison Lithium owns being wholly or principally to the real property interests. Whatever they might be. And that’s the sort of decision that your Honour really has to make as a matter of judgment.
These are judgment calls, based upon the evidence. This is not a strict calculation, as in 855, where someone gets, you know, a pencil and writes down some figures and works out whether X is, you know, less than 50 per cent of Y. This is a case where your Honour has to look at the operations that your Honour has heard a lot of evidence about and form a view about is it wholly or principally attributable to what, and so again, every time we look at the purported application of these provisions in the context of this complex operation, one is hit by this sense of unreality that these profits are business profits and ought to be protected by article 17. These profits are not simply profits from the alienation of an identifiable asset.
In considering the effect of s 3A(2) of the Agreements Act, and of Article 13 of the United States Convention, it is important to bear in mind that they are not independent taxing provisions, but that their terms bear upon the allocation of, and the possible limitation upon, taxing rights. The question, therefore, is not whether it is possible to say that the value of the Talison Lithium shares was principally attributable to real property or interests, but whether the tax effected by Division 855 of the 1997 Act is upon the value of assets which was principally or wholly attributable to such real property or interests. It is true that s 3A(2) of the Agreements Act modifies the Australian domestic application of the United States Convention to the limited extent of including in the profits or gains from the alienation or disposition of shares or other interests in companies, the value of those assets which are “wholly or principally attributable” to such real property or such interests, but Division 855 is the means by which that is achieved. Section 3A(2) is directed to the meaning to be given to the provision of a treaty which has effect as domestic Australian law, and provides that the meaning of the words in the treaty is extended to include the additional words found in s 3A(2). The words in s 3A(2) which extend the meaning of the words found in Article 13 of the United States Convention (which have effect as domestic Australian law) should, unless the provisions or context requires otherwise, be construed as if they were part of the treaty in the manner explained in Thiel and Macoun and, of course, they are to be construed consistently with Australia’s obligations under the United States Convention (see Minister for Immigration and Ethnic Affairs v Teoh (1995) 183 CLR 293, 287) but no less liberally than other treaties by reason of the United States Convention being a bilateral double tax treaty (see Lamesa at 603-4).
88 The legislature has given effect to the United States Convention by giving it domestic legal force and has also enacted Division 855. The extended operation of the real property provision in Article 13 of the United States Convention through s 3A(2) of the Agreements Act is not in form the same as the operative terms of Division 855 of the 1997 Act, but the United States Convention and s 3A of the Agreements Act do not prescribe the means by which Australia may tax the value of assets which are “wholly or principally attributable” to real property interests. The extended operation of Article 13 which is effected by s 3A(2) of the Agreements Act is expressed to apply where the value of the assets is “wholly or principally attributable” to the real property or other interests. Determining whether the value of assets is attributable to real property calls for an inquiry into whether there was a sufficient causal connection between the real property and the value of the assets of the relevant entity. In Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488 the High Court considered the use of the word “attributable” in the context of s 160ZK(5) of the 1936 Act and said at :
It is the concept of causation, rather than source, with which s 160ZK(5) is concerned. In determining whether the plaintiff’s loss of employment was “attributable to” the provisions of the Local Government Act 1972 (UK), Donaldson J in Walsh v Rother District Council said (74):
“[T]hese are plain English words involving some causal connection between the loss of employment and that to which the loss is said to be attributable. However, this connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory causal connection is quite sufficient.”
Nothing, either in the text of s 160ZK(5) or in its objects as expressed in the Explanatory Memorandum on the Bill for the Amending Act, indicates that a narrower meaning should be presently ascribed to that phrase.
The adverbial phrase “whether directly, or indirectly through one or more interposed companies or other entities” in s 3A(2) directs attention not merely to the proximate source of the value but also to those acts or matters which constitute contributory causes: see Federal Commissioner of Taxation v Crown Insurance Services (2012) 207 FCR 247, - (per Jessup J dissenting but not inconsistent on this issue with the majority’s judgment). In Hayes v Commissioner of Taxation (1956) 96 CLR 47 Fullagar J said at 54 of the use of the words “directly or indirectly” (then found in s 26(e) of the 1936 Act) that they were “doubtless intended to cast the net very wide” but “that there must be a real relation” between the matters in question: see also Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 at 553-4; Smith v Federal Commissioner of Taxation (1987) 164 CLR 513 at 530. In the case of s 3A(2) the connection required between the value of assets and the real property is governed by the words “wholly or principally”. Division 855 is consistent with that requirement and, where there may be any doubt, Division 855 should be construed consistently with the terms of the United States Convention in accordance with s 3A(2) of the Agreements Act. The object of Division 855, however, is consistent with Article 13. The object of Division 855 was expressed by s 855-5(2) to be achieved by aligning Australia’s tax laws with international practice and by ensuring that “interests in an entity remain subject to Australia’s capital gains tax laws if the entity’s underlying value is principally derived from Australian real property”. The ordinary meaning of the words in s 3A(2) of the Agreements Act, when given to the relevant provisions of the United States Convention (having effect as domestic Australian law), are broad enough to encompass the tax effected by Division 855 of the 1997 Act.
89 Division 855 of the 1997 Act permits a foreign resident to disregard a capital gain unless the relevant CGT event was a direct or indirect interest in Australian real property or related to a business carried on by a foreign resident through a permanent establishment in Australia: s 855-1. A condition in s 855-10(1) permitting a capital gain to be disregarded was that a CGT event happened in relation to a CGT event that was not “taxable Australian property”. Section 855-15 identified five categories of “taxable Australian property” of which the first two were in dispute in this proceeding. The Commissioner contended that the disposals by the partners of the RCV IV and RCF V partnerships were of “taxable Australian real property” as described in item 1 of the Table in s 855-15 or of “an indirect Australian real property interest” as described in item 2 of the Table in s 855-15. It was otherwise common ground between the parties that the partners had made a capital gain on the disposal of the shares in Talison Lithium, and that Division 855 of the 1997 Act allowed a foreign resident to disregard a capital gain or capital loss arising on a CGT event unless the CGT event was a direct or indirect interest in taxable Australian property as contemplated by s 855-10(1).
90 It is desirable to consider first whether the disposal by the RCF IV and RCF V partners was a CGT event of taxable Australian property excluded from tax by s 855-10(1) of the 1997 Act, although the issues raised in this context will have a bearing upon the values of taxable Australian real property to be considered later in the context of the evidence of the experts. Section 855-15 provides that there are five categories of taxable Australian property of which the first is “taxable Australian real property” as described in item 1 of the Table in s 855-15, and to be determined by reference to s 855-20 which includes a “mining, quarrying or prospecting right” as follows:
855‑20 Taxable Australian real property
A CGT asset is taxable Australian real property if it is:
(a) real property situated in Australia (including a lease of land, if the land is situated in Australia); or
(b) a mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, petroleum or quarry materials are situated in Australia.
The expression “mining, quarrying or prospecting right”, as used in s 855-20, is defined in s 995-1 to mean:
mining, quarrying or prospecting right is:
(a) an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials; or
(b) a lease of land that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land; or
(c) an interest in such an authority, licence, permit, right or lease; or
(d) any rights that:
(i) are in respect of buildings or other improvements (including anything covered by the definition of housing and welfare) that are on the land concerned or are used in connection with operations on it; and
(ii) are acquired with such an authority, licence, permit, right, lease or interest.
However, a right in respect of anything covered by the definition of housing and welfare in relation to a quarrying site is not a mining, quarrying or prospecting right.
The words “mine, quarry or prospect” in this definition are not defined further and take their ordinary meaning to describe identifiable intangible assets of three distinct types, namely, an entitlement to engage in a particular activity, an interest in such an entitlement, and rights that are acquired with any such entitlement: see Mitsui & Co (Australia) Ltd v Federal Commissioner of Taxation (2012) 205 FCR 523. The Full Court said in Mitsui at 533-5:
45 The structure of the definition of “mining, quarrying or prospecting right” in s 995-1 is important. The words used in the definition describe several identifiable intangible assets. Each is a depreciating asset for the purposes of Div 40, notwithstanding that each is a species of intangible property. There are three distinct types of asset, as follows:
• The first type is “an entitlement to engage in a particular activity”: that entitlement must be under an Australian law or under a lease of land. Further, the activity must be mining, quarrying or prospecting and the object of that mining, quarrying or prospecting must be minerals, petroleum or quarry materials.
• The second type is “an interest in such an entitlement”.
• The third type is “rights that are acquired with any such entitlement”: those rights must be in respect of buildings or other improvements that are on the land that is the subject of the entitlement, or must be used in connection with operations on land that is the subject of the entitlement.
It is clear enough that the type that is relevant in the present case is the second type, being an “interest” in such an entitlement. That is what Mitsui acquired under the Sale Agreement. That is what was registered under s 81 of the Petroleum Act.
46 The fact that, under the definition in s 995-1, a right under an Australian law to mine, quarry or prospect is something in which a person may have an “interest” signifies that such a right to mine, quarry or prospect must be something that is recognised by an Australian law. The concepts of “licence” and “permit” are expressly recognised by the Petroleum Act. Each is described in the Petroleum Act as a title. While the term “lease” appears in the Petroleum Act, being a retention lease, it is clear that a retention lease is not a “lease of land” as referred to in the first type of asset described above. A retention lease is referred to in the Petroleum Act as a title and is, accordingly, within the first type of asset described above.
47 It follows that the type of asset that is an “authority”, “licence”, “permit” or “right” under an Australian law is a mining title under an Australian law, together with all underlying rights that are incidents of the mining title. It is not simply one of the underlying rights that happen to be incidents of such a mining title. The word “right”, as used in relation to the first type of asset, as distinct from the word “rights”, as used in relation to the third type of asset, is clearly intended to be of the same character as an authority, licence, permit or lease. The word “right” in the first type does not refer to something that is merely an incident of something else granted under an Australian law. Accordingly, the word “right”, as distinct from the word “rights”, does not refer to the underlying statutory rights conferred by a mining title, which might be an authority, licence, permit, right or lease. A “right” in relation to the first type of asset is not a mere incident of an authority, licence or permit. It is something of the same nature and character as an authority, licence or permit and allows those different rights, such as mining, quarrying and prospecting, to be exercised.
48 It is significant that the definition of the third type of asset refers to “rights” acquired with an authority, licence, permit or right. That confirms that particular rights that may be incidents of a right under an Australian law are different from the right itself. If the word “right” refers to underlying incidental rights conferred by a statute, the preceding words, “authority”, “licence” and “permit”, would have virtually no work to do.
49 The use of the plural “any rights” in the third type of asset highlights the use of the singular “right” in conjunction with the words “authority, licence” and “permit” in the first type of asset. Thus, the third type refers to rights that are acquired with an authority, licence, permit, right or lease. If “right” when used in the first type were intended to refer to specific incidents of an entitlement granted under an Australian law, it would be curious to speak of “any rights” acquired with such a right. Rights in respect of buildings or other improvements are incidents of the mining title, with which such rights might be acquired.
50 Thus, the words “authority”, “licence”, “permit”, “right” and “lease” are descriptive of the various types of mining titles that might arise under various Australian laws. The fact that a particular Australian law dealing with a mining title might use a different term to convey the concept of authority, permission or licence to mine, quarry or prospect, such as the term “retention lease” in the Petroleum Act, does not mean that that mining title cannot fall within the definition. It will do so if it can fairly be characterised as an authority, licence, permit or right to mine, quarry or prospect for minerals or petroleum.
51 The Taxpayer attaches some significance to administrative procedures adopted under the Petroleum Act. For example, on 3 March 2004, notice was given to Woodside that the Joint Authority was prepared to grant production licences “over the Enfield Field”. The letter indicated that the Enfield Plan, as submitted by Woodside, had been accepted. Woodside responded to that notification on 26 March 2004, submitting a request for the grant of production licence over the Enfield Blocks, as detailed in the notice of 3 March 2004. Production licence WA-28-L was forwarded to Woodside under cover of a letter dated 29 March 2004. That letter also referred to the Enfield Field. The Taxpayer attaches significance in the same vein to the provisions of ss 40-95 and 40-110 of the 1997 Assessment Act. Those provisions refer to “petroleum fields”. The Taxpayer contends therefore, that the scheme of Div 40 expressly contemplates rights in respect of petroleum fields, rather than blocks.
52 However, the Taxpayer’s approach involves treating rights in relation to specific petroleum fields as constituting distinct and separate depreciating assets. The definition of “mining, quarrying or prospecting right” in s 995-1 makes no reference to a particular physical field or site. More importantly, the Petroleum Act does not grant rights in respect of a specific field or site. Rather, it grants rights only in respect of graticular blocks. The provisions relied on by the Taxpayer do not change the scheme of the Petroleum Act insofar as that Act confers a permit, licence or lease only in respect of graticular blocks and not in respect of petroleum fields.
53 The fact that a mining title, such as an authority, licence or permit, may derive its value from the underlying entitlements that it confers says nothing about whether each of those entitlements is itself a separate depreciating asset for the purposes of Div 40. Division 40 draws a clear distinction between expenditure for exploration and expenditure for production. Through s 40-80, an immediate deduction is allowed for expenditure incurred on exploration or prospecting for minerals, including petroleum. Thus, Div 40 provides an immediate deduction for depreciating assets first used for exploration. That would include the cost of an exploration permit. On the other hand, under Subdiv 40-I, a deduction is provided for mining capital expenditure, but only over the effective life of the mining project. That points towards the conclusion that the cost of acquiring a production licence could not be the subject of an immediate deduction for a depreciating asset first used for exploration.
The applicants submitted that the operations at Greenbushes comprised three separate operations, including mining, but that only the mining leases permitted mining. The other two operations were said to be highly sophisticated processing or manufacturing operations that were submitted therefore not to come within the meaning of taxable Australian real property in s 855-20 of the 1997 Act.
91 The relevant operations were described in affidavits by Mr Peter Oliver and Mr Peter Ingham. Mr Oliver was a consultant for Tianqi HK Co Limited (“Tianqi HK”) but had been the Chief Executive Officer and Managing Director of Talison Lithium from January 2010 to March 2013. Mr Ingham was an expert who had been retained by the applicants to provide an expert report for use in these proceedings. The relevant operations were also described in the scheme booklet dated 7 January 2013 to explain the transaction resulting in the sale of the shares in Talison Lithium by Windfield acquiring the shares in Talison Lithium.
92 Mr Oliver explained that Talison Lithium operated the Greenbushes lithium operation located near the town of Greenbushes in south-west Western Australia. He joined the Greenbushes operation in 2003 as the Tantalum Secondary Plant Superintendent when the mine was operated by Sons of Gwalia. He remained in the business after it was sold by the administrators of Sons of Gwalia to Talison Minerals in August 2007 and was subsequently promoted to Production Manager, and ultimately to General Manager of Operational Planning and Chief Executive Officer of Talison Lithium, through the corporate reorganisations which were, in part, described above. There had been mining operations at Greenbushes since the late 19th century: tin had been mined at Greenbushes from 1888 and tantalum from the 1940s. Lithium mining began in about 1983, initially as a by-product of the tantalum mining, but over time the lithium business became a business in its own right as specialist markets developed for high purity lithium mineral concentrates. Lithium is highly reactive and is never found in its elemental form, and is either extracted from lithium containing minerals in hard rock or from lithium bearing brines found in a small number of salt (brine) lakes. The largest global market for lithium is in the production of glass and ceramics, although demand for lithium increased with the growth of lithium ion battery technology. The most significant economical sources of lithium are brine lakes or “Salars” in a region of Chile and neighbouring Argentina, however, high purity lithium mineral concentrates are uniquely found at Greenbushes in Western Australia.
93 Mr Oliver explained the process involved in the production of Chemical Grade or Technical Grade concentrates after extraction. An independent technical specialist review produced by Behre Dolbear Australia Pty Ltd dated 22 October 2012 set out in more detail the production and processing of the ore after extraction from the ground. Ore extracted through mining must undergo primary processing to remove impurities and to increase concentration of the lithium content to produce various grades of mineral concentrates. The Greenbushes lithium mineral concentrates were produced using gravity, heavy media, flotation and magnetic processes. Some parts of the ore body at Greenbushes were able to produce high purity concentrate with very low iron content which is classified as “Technical Grade”. Talison Lithium also produced “Chemical Grade” concentrates which undergo further processing to create lithium chemicals used in the manufacture of, amongst other things, lithium batteries. As at March 2013 Talison Lithium was estimated to be producing approximately 100,000 tonnes per annum of Technical Grade concentrate and approximately 250,000 tonnes per annum of Chemical Grade concentrate. Of this, approximately 50% of the profit of the operations was derived from Technical Grade concentrate sales.
94 The Greenbushes operation included open pit and underground mines, a crushing facility, two lithium mineral processing plants, primary and secondary tantalum processing plants, and associated infrastructure. The difference between Technical Grade and Chemical Grade ores is essentially in the lower iron content in the Technical Grade ore. Iron may be present in the ore body as separate iron minerals (which is referred to as “free iron”) or it may be bound up in the crystalline lattice of the spodumene mineral at a molecular level. The Technical Grade concentrates produced at Greenbushes have a high concentration of lithium and up to one tenth of the iron content of other spodumene mineral concentrates found elsewhere in the world. The low iron content found in the Greenbushes sites allows the mineral concentrates to be used in some applications of glass and ceramic production without extensive chemical conversion to lithium chemicals and the unique nature of the Greenbushes ore body allowed production of Technical Grade products.
95 Talison Lithium held 13 mining leases as at 19 March 2010, and also held general purpose leases and miscellaneous licences. Amongst the leases and licences held by Talison Lithium, was General Purpose Lease 01/1, General Purpose Lease 01/2 and a Miscellaneous Licence 01/1. General Purpose Lease 01/1 had been granted for terms commencing on 17 November 1986 and had a date of expiration of 5 June 2028. The endorsement for both general purpose leases provided that they were to “remain in force until the surrender, forfeiture or expiry of Mining Lease 01/16 in respect of which it was granted and shall then expire”. Each general purpose lease contained remediation provisions, including a clause requiring that all building and structures were to be removed from the site at the completion of operations or were to be demolished or buried to the satisfaction of an environmental officer of the Department of Mines and Petroleum. The miscellaneous licence had been granted on 19 March 1986 for the purpose of water and was endorsed to remain in force until the surrender, forfeiture or expiry of Mining Lease 01/2 in respect of which the mining licence was granted. The applicants concede that the mining leases came within the definition of “mining, quarrying or prospecting right” for the purposes of s 855-20 of the 1997 Act but contended that the general purpose leases and the miscellaneous licence did not.
96 The two general purpose leases were both granted under the Mining Act 1978 (Western Australia) (“the Mining Act”). Division 3 of Part IV of the Mining Act provided for the grant of mining leases, Division 4 provided for the grant of general purpose leases, and Division 5 provided for the grant of miscellaneous licences. Section 85 provided for the rights of the holder of a mining lease which included the working and mining of the land in respect of which the lease was granted for any minerals. Section 87 set out the purposes for which a general purpose lease could be granted as follows:
87. Purposes for which general purpose lease may be granted
(1) A general purpose lease entitles the lessee thereof and his agents and employees to the exclusive occupation of the land in respect of which the general purpose lease was granted for one or more of the following purposes —
(a) for erecting, placing and operating machinery thereon in connection with the mining operations carried on by the lessee in relation to which the general purpose lease was granted;
(b) for depositing or treating thereon minerals or tailings obtained from any land in accordance with this Act;
(c) for using the land for any other specified purpose directly connected with mining operations.
(2) The purpose or purposes for which a general purpose lease is granted shall be specified in the lease.
General Purpose Lease 01/1 was granted for the purpose of concentrating lithium ore and General Purpose Lease 01/2 was granted for the purpose of depositing of lithium ore tailings. Both of the general purpose leases related to the processing of the minerals once they have been extracted.
97 Neither the general purpose leases nor the miscellaneous licence come within paragraphs (a), (b), or (c) of the definition of “mining, quarrying or prospecting right” in s 995-1 of the 1997 Act. The dispute between the parties centred, however, on whether they fell within paragraph (d) of the definition, namely, rights that:
(i) are in respect of buildings or other improvements (including anything covered by the definition of housing and welfare) that are on the land concerned or are used in connection with operations on it; and
(ii) are acquired with such an authority, licence, permit, right, lease or interest.
The definition of “mining, quarrying or prospecting rights” in paragraph (d) of the definition in s 995-1 of the 1997 Act requires that there be three elements established: namely (a) that there must be rights in respect of buildings or other improvements, (b) that those buildings or other improvements must be either on land over which a right to mine, quarry or prospect for minerals has been granted, or that those buildings or other improvements have been used in connection with operations on land over which a right to mine, quarry or prospect for minerals has been granted, and (c) that the rights must be “acquired with” the right to mine, quarry or prospect. In that context, the Commissioner emphasised the purpose for which the general purpose leases had been granted and what that had permitted in the physical context of the land in question. The purpose of General Purpose Lease 01/1 was for extracting lithium ore and covered an area on which were located the two separate processing plants for the processing, respectively, of technical grade and chemical grade product. Each of the two plants had extensive concrete foundations, was contained within roofed structures supported by steel beams that were bolted or welded to the concrete foundations, and to each other, and comprised components that were bolted, welded or otherwise attached to the concrete foundations or steel beams or other components that were so affixed and which formed part of a single integrated processing operation. The physical structures were substantial and could be seen clearly from aerial photographs and from photographs shown on other material which had been tendered through an affidavit of Mr Oliver.
98 Neither the general purpose leases themselves, nor the miscellaneous licence itself, however, gave rights to the buildings or other improvements as contemplated by paragraph (d)(i) of the definition of “mining, quarrying or prospecting right”. There is a distinction between mining and the further processing of minerals once they have been extracted from the ground. In Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (1969) 120 CLR 240 the High Court said at 273:
We do not doubt that to separate what it is sought to obtain by mining from that which is mined with it, e.g., the separation of gold from quartz by crushing etc., or the separation of tin from dirt by sluicing, is part of a " mining operation" but we would not extend the conception to what is merely the treatment of the mineral recovered for the purpose of the better utilization of that mineral. Thus to crush bluestone in a stone crushing plant so that it can be used for road making, or to fashion sandstone so that it becomes suitable for building a wall or a town hall is not, as we see it, a mining operation. Nor would the cutting of diamonds or opals which have been recovered by mining operations fall within the description of mining operations. In Federal Commissioner of Taxation v. Henderson it was decided that to obtain gold from gold-bearing material, i.e., slum dumps, by sluicing, screening, filtering and chemical treatment was a mining operation and this, of course, we accept. The reason for so deciding, however, has no application to a process that does no more than either reduce in size lumps of ironstone of manageable size taken from the earth, or, to increase the size of small fragments of ore taken from the earth in order that the ore which has been mined can be conveniently carried away from the mine and· utilized in steel making. In Henderson's Case the object of the taxpayer’s mining operations was to obtain gold and those operations comprehended all the steps in the recovery of gold from the slum dumps; here the object of the taxpayer's mining operations is to obtain iron ore-the end product--and those operations comprehend all the steps taken to do so, but once the iron ore is obtained in manageable lumps then its further treatment, either to reduce or increase its size so that it can be conveniently transported from the mine and better utilized in industry, forms no part of the mining operation.
In TEC Desert Pty Ltd v Commissioner of State Revenue (WA) (2010) 241 CLR 576 the High Court in a joint judgment observed that the position at common law was that a right to mine land gave no interest in the land, saying at 587, :
This treatment of mining tenements in the Australian statutory system had been foreshadowed by the law in England. The general position under the common law in England with respect to the grant by a freeholder of a licence to work a mine was described by Page Wood V-C in London and North-Western Railway Co v Ackroyd as follows:
“[A] licence to work a mine is only a licence to get the minerals, and when you have got them, you have done all you have a right to do, and you have no interest in the land.”
(Footnote omitted); see also Placer Dome Inc v Commissioner of State Revenue  WASCA 165, .
In the present case there was no suggestion that any of the buildings used under General Purpose Lease 01/1 existed before the grant of the general purpose leases and the miscellaneous licence. The evidence was, rather, that they were constructed for the processing of the lithium ore as the business operations developed over time. The general purpose leases themselves do not purport to give rights in respect of any of the buildings or other improvements but only to permit the activities undertaken in them. The connection required by paragraph (d) of the definition between the “rights” and the “buildings or other improvements” is that the former be “in respect of” the latter. That requires there to be a sufficient or material connection between the two: J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402 at . A connection of that kind requires that rights in respect of the buildings or other improvements flow from the rights granted by, in or under the general purpose leases or miscellaneous licence. A sufficient connection is not established if, as was the case here, the entitlement to the buildings arose independently from any rights granted under the general purpose leases and miscellaneous licence. It is true that Talison Lithium had buildings and other improvements in the area covered by the general purpose leases and the miscellaneous licence, it is also true that Talison Lithium had rights in respect of those buildings and other improvements, but they were not rights given by or under, or in respect of, the general purpose leases or the miscellaneous licence.
99 It may therefore not be necessary to consider in detail a subsidiary issue which arose about whether the two plants and related infrastructure were chattels owned by Talison Lithium separately from the land upon which they had been constructed. The appellants had submitted that a reason for concluding that the two plants and relevant infrastructure did not fall within paragraph (d) of the definition of “mining, quarrying or prospecting rights” was that the general purpose leases and miscellaneous licence did not grant rights in respect of Talison Lithium’s own assets which included its rights over them as the absolute owner. It was thus submitted for the appellants that “one could not describe absolute ownership of a chattel as ‘a right in respect of’ the chattel especially where para (d) takes its meaning in the context of the previous 3 paras and should be read ejusdem generis”. The Commissioner disputed those submissions and also whether the two plants and related infrastructure were absolutely owned by Talison Lithium or were chattels.
100 In TEC Desert the High Court held that mining tenements under the Western Australian legislation were personal property. The Court in that case followed what had previously been said in Adamson v Hayes (1973) 130 CLR 276 that the rights granted to the holder of a mining tenement were not an interest in the land. In TEC Desert the Court said at 586-90:
28 Speaking of the 1904 Act, and more generally of the scheme of mining legislation in Australia, in Adamson v Hayes Barwick CJ explained that it was by the mechanism provided by statute “rather than by the creation of any actual estate or interest in the land” that the holder of a mining tenement was provided with the security adequate for the furtherance of the mining activity. Stephen J added ,that “no interest in land is involved in any ordinary sense of that term”.
29 This treatment of mining tenements in the Australian statutory system had been foreshadowed by the law in England. The general position under the common law in England with respect to the grant by a freeholder of a licence to work a mine was described by Page Wood V-C in London and North-Western Railway Co v Ackroyd as follows:
“[A] licence to work a mine is only a licence to get the minerals, and when you have got them, you have done all you have a right to do, and you have no interest in the land.”
35 Section 85 of the 1978 Act describes the authorities conferred by a mining lease as exclusive rights for mining purposes in relation to the land in respect of which the mining lease was granted, and confers ownership of all minerals lawfully mined from that land, subject to the Act and any conditions to which the mining lease is subject. Mining leases under the 1978 Act commonly contain conditions requiring removal of all buildings and structures from the site at the completion of operations under the mining lease. Further, s 114 makes detailed provision where a mining tenement expires or is surrendered or forfeited for the removal by the holder of the mining tenement, or in default thereof at the direction of the Minister, of “mining plant”. This term is defined as “any building, plant, machinery, equipment, tools or any other property of any kind whether affıxed to land or not so affıxed” (s 114(1)) (emphasis added). Section 114 thus operates upon the statutory assumption that what is “mining plant” is not determined by the general law respecting the affixture of chattels to the freehold, of which they then became part and to which the general law respecting removal of tenant’s fixtures applies.
36 Section 119 of the 1978 Act provides that mining tenements may be sold or disposed of and be the subject of legal and equitable interests, but requires that dispositions thereof be effected by a signed written instrument. The 1904 Act (s 306(14)) authorised the making of regulations providing for the transfer, assignment and sub-leasing of mining tenements under that statute. In Ward reference was made to the many examples of the exercise by courts of equity of their jurisdiction to protect the enjoyment by the plaintiff of rights which were conferred by or under statute, but were not necessarily proprietary in character, whether as personalty or realty. Thus, the exercise of equitable jurisdiction with respect to mining tenements is not necessarily indicative of the character of those tenements as interests in realty rather than as personalty.
38 It follows from the statements of principle set out earlier in these reasons that items affixed to land do not become, merely because of their affixation, “fixtures” in the technical sense.
39 WMC warranted (sub-para (ii) of cl 8.1(c)) that, with respect to Fixtures on land not being freehold land owned by WMC but land the subject of mining tenements, WMC had such rights as were conferred by the 1904 Act and the 1978 Act. Further, in cl 1.1 of the Sale Agreement the term “Fixture” was carefully defined. This was as “an item of property affixed to land, and an estate or interest in which is therefore an estate or interest in land” (emphasis added). The presence of the conjunction “and” is important. The definition was not apt to catch items which were “mining plant” within the meaning of s 114 of the 1978 Act and which, given the nature of a mining lease as personal property, were not fixtures which thereby would have assumed the character for the purposes of the Stamp Act of an estate or interest in land.
It may be accepted, as was submitted by the Commissioner, that the decision “is not authority for the proposition that items affixed to the land by the lessee to whom a mining tenement has been granted are always chattels”, but that does not warrant construing the connection required by paragraph (d) of the definition in s 995 of the 1997 Act of “mining, quarrying or prospecting rights”, to be satisfied by the presence of buildings or other improvements used for the processing of minerals after completion of what would fairly be encompassed by mining, quarrying and prospecting rights. The position of a tailings dam, however, used to deposit tailings arising in the mining operations may be different. The Commissioner correctly submitted in relation to the tailings dam that the right to deposit tailings on the land conferred by General Purpose Lease 01/2 was a right “in respect of” an improvement in the sense that it was a right “to make use of the improvement – in this case, a tailings dam”. The applicants’ submission to the contrary cannot be accepted because the right given by General Purpose Lease 01/2 was a right to deposit tailings by permitting the depositing of lithium ore tailings in the area identified. That conclusion may require some recalculation by the experts of the value of taxable Australian real assets before making final orders in the proceedings.
101 It follows, however, that the value of the assets to be determined for purposes of s 855-20 do not include the value of the general purpose leases, the miscellaneous licence or the plant and equipment used by Talison Lithium in the processing of the minerals after extraction by mining: see also Placer Dome Inc v Commissioner of State Revenue  WASCA 165. The Greenbushes operations carried on by Talison Lithium comprised two distinct sets of operations, namely mining and mineral processing. The first required a mining lease but the second did not. The first set of operations constituted mining for minerals for which a licence was required under the Mining Act, but the second set of operations, constituting the processing of the minerals, did not require a mining licence. Section 85(2)(b) of the Mining Act expressly provided, subject to the Act and to any conditions to which the mining lease was subject, that the lessee of a mining licence owned all minerals lawfully mined from the land under the mining lease. The ordinary meaning of mining is the “action, process or industry of extracting ores” and that activity was complete upon the recovery of the ore from the earth in the absence of an extended meaning: see Macquarie Dictionary “mining”; Federal Commissioner of Taxation v ICI Australia Ltd (1972) 127 CLR 529 at 563-4; cf also Collector of Customs v Bell Basic Industries Limited (1988) 83 ALR 251. It follows that on this basis of assessment of the RCF IV and RCF V partners there is to be excluded from the taxable value of the capital gain, the value attributable to the general purpose leases, the miscellaneous licence and the plants used in the processing operations rather than in the mining.
102 The alternative basis submitted by the Commissioner for assessing the capital gain was that the CGT event was not to be disregarded to the extent that the CGT asset was indirect Australian real property. The second of the five categories of CGT assets that are “taxable Australian property” in the table in s 855-15 of the 1997 Act is an “indirect Australian real property interest” within the meaning of s 855-25. The applicants will have an “indirect Australian real property interest” for the purposes of s 855-15, item 2, in Talison Lithium if the interests they have pass both the “non-portfolio interest test” and the “principal asset test” within the meaning of s 855-25. That section provided:
Section 855-25. Indirect Australian real property interests
(1) A membership interest held by an entity (the holding entity) in another entity (the test entity) at a time is an indirect Australian real property interest at that time if:
(a) the interest passes the non-portfolio interest test (see section 960-195):
(i) at that time; or
(ii) throughout a 12 month period that began no earlier than 24 months before that time and ended no later than that time; and
(b) the interest passes the principal asset test in section 855-30 at that time.
(2) For the purposes of subsection (1), in working out whether the interest passes the non-portfolio interest test and the principal asset test in section 855-30:
(a) apply section 350 of the Income Tax Assessment Act 1936 as if the words “, or is entitled to acquire,” (wherever occurring) were omitted; and
(b) apply section 351 of that Act as if:
(i) the words “, or that the beneficiary is entitled to acquire” (wherever occurring) were omitted; and
(ii) the words “, or that the entity is entitled to acquire” in paragraph 351(2)(d) were omitted.
(3) The first element of the cost base and reduced cost base of a CGT asset on 10 May 2005 is the market value of the asset on that day if, on that day:
(a) the CGT asset was a membership interest you held in another entity; and
(b) you were a foreign resident, or the trustee of a trust that was not a resident trust for CGT purposes; and
(c) the CGT asset was a post-CGT asset; and
(d) the CGT asset did not have the necessary connection with Australia (within the meaning of this Act as in force on that day) disregarding the operation of paragraph (b) of item 5 and paragraph (b) of item 6 of the table in section 136-25 (as in force on that day).
(4) Also, Parts 3-1 and 3-3 apply to the asset as if you had acquired it on that day.
An interest passes the “non-portfolio interests” test if the sum of the relevant interests exceeds 10% of the interests in the relevant entity. Section 960-195 provides:
An interest held by an entity (the holding entity) in another entity (the test entity) passes the non-portfolio interest test at a time if the sum of the direct participation interests held by the holding entity and its associates in the test entity as the time is 10% or more.
The applicants accepted, and it was common ground, that they passed the non-portfolio interest test in s 960-195 for the purposes of s 855-25(1)(a) because, at the relevant time, the partners in RCF IV held 23.1% of the ordinary shares in Talison Lithium and the partners in RCF V held 13.1% of the ordinary shares in Talison Lithium. The direct participation interest of each therefore exceeded the prescribed 10% referred to in s 960-195.
103 Whether the interests of the applicants in Talison Lithium also passed the principal asset test, for the purposes of s 855-25(1)(b), requires consideration of whether 50% or more of the market value of the assets of Talison Lithium were attributable to Australian real property. Section 855-25(1)(b) requires that the interest passes the principal asset test in s 855-30 at the relevant time which, for present purposes, was the time of disposal by the partners of the partnerships of the shares. The purpose of s 855-30 is to define when an entity’s underlying value is principally derived from Australian real property and requires determining which assets were taxable Australian real property assets (referred to as “TARP” assets) and which assets are non-taxable Australian real property assets (referred to as “non-TARP” assets). Section 855-30 provided:
855-30 Principal asset test
(1) The purpose of this section is to define when an entity’s underlying value is principally derived from Australian real property (see paragraph 855-5(2)(b)).
(2) A membership interest held by an entity (the holding entity) in another entity (the test entity) passes the principal asset test if the sum of the market values of the test entity’s assets that are taxable Australian real property exceeds the sum of the market values of its assets that are not taxable Australian real property.
(3) For the purposes of subsection (2), treat an asset of an entity (the first entity) that is a membership interest in another entity (the other entity) as if it were instead the following 2 assets:
(a) an asset that is taxable Australian real property (the TARP asset);
(b) an asset that is not taxable Australian real property (the non-TARP asset).
(4) For the purposes of subsection (2), treat the market value of the TARP asset and the non-TARP asset according to the following table.
(5) For the purposes of this section, disregard the market value of any asset acquired by the test entity, or by any other entity, if the acquisition was done for a purpose (other than an incidental purpose) that included ensuring that a membership interest in any entity would not pass the principal asset test in this section.
The application of these provisions to the partners in the RCV IV and RCF V partnerships therefore required determining which of the assets in Talison Lithium came within the meaning of taxable Australian real property asset (TARP) and which came within the meaning of non-taxable Australian real property assets (non-TARP).
104 Five experts were retained by the parties who produced two joint expert reports for the purposes of the proceedings. One joint expert report was that of Mr Tony Samuel, Mr Ken Prendergast and Mr Julian Hine which was directed to determining the taxable Australian real property assets of Talison Lithium upon certain assumptions. The second joint expert report was of Mr David Mitchell and Mr Ross Henderson on the market value of the plant and equipment. Mr Pendergast, Mr Hine and Mr Mitchell had each been retained by the applicants for the purposes of providing expert evidence in the proceedings. Mr Samuel and Mr Henderson had each been retained by the Commissioner for the same purpose.
105 The joint expert report by Mr Mitchell and Mr Henderson revealed a large measure of agreement between them on the value of the plant and equipment as at 26 March 2013. Mr Mitchell had valued the plant and equipment as at that date at $114.1 million whilst Mr Henderson had valued the plant and equipment at $112.1 million. They agreed that the mid-point was $113.1 million and neither party sought to challenge that as the appropriate value of the plant and equipment of Talison Lithium as at 26 March 2013. Mr Mitchell and Mr Henderson effectively agreed during the course of oral evidence that the final market values for the assets owed by Talison Lithium as at 26 March 2013 was $113.1 million.
106 There was much less common ground in the joint expert report of Mr Pendergast, Mr Hine and Mr Samuel. The disagreement between them was in part due to the different assumptions they were asked to make but in part it was also due to the different methodologies they had adopted. The experts summarised their differing market value of the taxable Australian real property and non-taxable Australian real property assets in the following table:
Pendergast Case 1
Pendergast Case 2
Samuel Case 1
Samuel Case 2
The joint expert report of Mr Pendergast, Mr Hine and Mr Samuel included a lengthy summary of the key opinions of each of the three experts. Central to the differences between the experts, and to the positions of the parties, was the use by Mr Pendergast of a “netback method” to determine the value of the ore at a point before its further processing and the competing use by Mr Samuel of what he described as “the market approach”.
107 The application of the principal asset test required identifying the total value of the assets constituting the elements to determine whether the taxable Australian real property (TARP) assets exceeded the non-taxable Australian real property (non-TARP) assets. It was central to the applicants’ case in this regard that the valuation of the assets required that the assets and operation of the enterprise to be valued involved both the mining of the ore body (“the upstream operations”) and the subsequent operations after extraction and severance of the ore from the ground (“the downstream operations”). The applicants’ case was that the value of the ore extracted from the ground was not part of the taxable Australian real property and that it had to be valued immediately after the resource had been extracted and severed from the ground. A difficulty in valuing the resource at the point of extraction, however, was that there was no observable price for the resource by comparable transactions and its valuation required some method for its reliable determination. Mr Hine had been instructed to provide a referenced and sourced expert report establishing a methodology for determining the value of the resource at a valuation point being immediately after the resource had been extracted and severed from the ground. Mr Hine was of the view that the “netback method” was a reliable and appropriate method to estimate the value of the resource at the valuation point, in the absence of an observable price at the valuation point, because it was possible to identify and to measure the value of Talison Lithium’s economically significant “downstream” activities, and because the netback method was widely used in a mining context throughout the world to determine the value of a resource at a particular point in the value chain. The “netback method” does not directly purport to value the mining leases but sought to determine the value of the minerals obtained pursuant to the rights granted under the mining leases. Those values were then used as the starting point to determine the value of the leases which had permitted the minerals to be extracted and to become the property of the holder of the mining leases. The “netback method” thus began with the sale price of the processed lithium products from which was to be subtracted the charges and costs of processing, transporting, marketing and other costs that arose “downstream” (that is, that were occasioned “after”) the valuation point, together with a reasonable profit margin which an arm’s length producer would expect to make.
108 Mr Pendergast applied the “netback method” to the Greenbush Lithium operation to estimate the value of the minerals at the valuation point. In his opinion the principal value of a mining lease was the right to extract minerals from the ground and he sought to determine the value of the lithium ore at the point from which it was extracted and severed from the ground. It was Mr Pendergast’s opinion that the value of the mining leases was “upstream” from the valuation point, with the processing of the lithium ore into its various products and the sales being “downstream” from the valuation point. Mr Pendergast’s assessment was also made on two bases. The first (“Pendergast Case 1”) was on the assumption that the Greenbushes mining leases enured for the full length of the life of the mine. The second (“Pendergast Case 2”) was on the basis that the Greenbushes mining leases enured only for the remainder of their then current term. The value of the non-taxable Australian real property (non-TARP) exceed the taxable Australian real property (TARP) in both cases.
109 Mr Samuel, in contrast, considered the netback method of valuation to be inappropriate in the present case as being “artificial, in that it requires the entity being valued to be separated into two non-existent hypothetical entities and also [to] hypothesise a third entity to determine the value of internal costs”. In Mr Samuel’s opinion the netback method was unnecessary because the entity to be valued, and its assets, could be valued without reliance upon the netback method. Mr Samuel summarised his opinion in respect of the taxable Australian real property issues in the joint report as turning upon the following issues:
(a) Whether for [taxable Australian real property] purposes the assessment of the value of mining leases requires consideration of the value at the point where the mineral is extracted from the ground;
(b) Whether the Netback Method is a valid valuation methodology in the context of a [taxable Australian real property] valuation;
(c) Whether the value of cash flows arising after 2028 can be attributed to an asset other than the mining leases, which Mr Pendergast labels the “VBML Intangible” [value beyond the Greenbushes mining leases];
(d) The treatment of intercompany receivables. In Mr Samuel’s opinion, insufficient accounting evidence [had] been provided to resolve which balances [were] correct. In any event, in the context of all assets being sold as a bundle, in Mr Samuel’s opinion the market value of an intercompany receivable would be nil… On this basis, the market value of [taxable Australian real property] assets in the Pendergast Case 1 valuation would exceed 50% of the market value of all assets. If Mr Pendergast’s instructions as to the treatment of intercompany loans are preferred by the Court, then the market value of [taxable Australian real property] assets in Mr Samuel’s valuation would continue to exceed 50% of the market value of all assets; and
(e) Which [Property, Plant and Equipment] should be treated as [taxable Australian real property]. […] If the instruction Mr Samuel received prevails over the instruction Mr Pendergast received then the market value of [taxable Australian real property] assets in the Pendergast Case 1 valuation would exceed 50% of the market value of all assets. If the instruction Mr Pendergast received prevails over the instruction Mr Samuel received then the market value of [taxable Australian real property] assets would continue to exceed 50% of the market value of all assets as illustrated by Mr Samuel’s Case 1 valuation.
In Mr Samuel’s opinion what he described as the “market approach” was the preferred methodology to determine the market value of Talison at the valuation date. In this case there had been an actual sale to Windfield of the shares and interests in question at a time coinciding with the valuation date which Mr Samuel considered to be appropriate as the basis upon which to calculate the market value. Mr Samuel did not perform separate calculations equivalent to Mr Pendergast’s Case 2 valuation for the reasons which he explained in the summary, but in Mr Samuel’s opinion the values of the non-taxable Australian real property were less than the taxable Australian real property.
110 The relevant legal principles for the determination of market value were not in doubt, although their application may be difficult. The test in Spencer v Commonwealth (1907) 5 CLR 418 at 427, 432 requires consideration of what a willing but not over anxious purchaser would have to offer to induce a willing but not over anxious vendor to sell an asset. That task may often simply require identifying comparable sales where they can be found in a market for those assets, but a different methodology may be required where that is not possible or where it is not appropriate: see also Placer Dome Inc v Commissioner of State Revenue  WASCA 165, -. The valuation of assets for the purposes of s 855-30 of the 1997 Act was considered by the Full Court in RCF III where the Court said at 303-4:
50 The question raised by the appeal is whether the market value of each asset is to be determined under s 855-30(2) as if each asset was the only asset offered for sale (as the primary judge held) or on the basis of an assumed simultaneous sale of SBM’s assets to the same hypothetical purchaser (as the Commissioner contended).
51 That question is to be answered in the statutory context and by reference to the statutory purpose for which the values are to be determined: that is, to ascertain whether SBM’s underlying value is principally in its TARP or non-TARP assets. In light of the statutory context and purpose, in our opinion it is implicit that to determine where the underlying value resides in SBM’s bundle of assets, 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 reference to “the sum” of the “market values” does not, even in its literal terms, require the ascertainment of the market value of each relevant asset separately, and then upon their ascertainment, an arithmetical calculation. The statutory criterion referred to in s 855-30(2) can still be applied by considering the matter on the basis of an assumed simultaneous sale of SBM’s assets to the same hypothetical purchaser. In our opinion there is insufficient indication in the language and context of s 855-30 to found what is, in our respectful opinion, the artificial conclusion for which RCF contended.
52 It follows that the assets should be valued on the basis of an assumed simultaneous sale of SBM’s assets to the same hypothetical purchaser, not as stand-alone separate sales.
53 By approaching the valuation on the basis that the market values of the individual assets were to be determined as if sold separately from the other assets, in our opinion the primary judge failed to give due recognition to the statutory context and purpose and fell into error by following the approach in Nischu, where the market value of the mining tenement was determined as a stand-alone asset. As Nischu does not apply, it is unnecessary to consider the Commissioner’s further submission that Nischu is no longer good law. Subject to what we say below, it also makes it unnecessary to consider the other issues raised by the appeal which only required determination if the primary judge’s valuation hypothesis was accepted as correct.
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 did not decide in RCF III that a netback methodology might not be appropriate in the application of the Spencer test. The question in that case had concerned the market value of assets which were ascertained as if they were offered for sale as a bundle, and all of 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 cost with little or no delay. Subsequently, McKerracher J explained in Federal Commissioner of Taxation v AP Energy Investments Pty Ltd (2016) 341 ALR 265 that the decision of the Full Court in RCF III was not to be read as imposing a prescriptive methodology by which the Spencer test was to be applied. His Honour said at -:
88 As I read [the decision of the Full Court in RCF III], apart from emphasising that each asset should be assessed on the basis of an assumed simultaneous sale of all of the assets to the same hypothetical purchaser, the Full Court did not examine the methodology used by the experts to arrive at the market value of SBM that would apply the Spencer test, other than to make a brief statement (at ). In the Court’s supplementary judgment (Commissioner of Taxation of the Commonwealth of Australia v Resource Capital Fund III LP (No 2)  FCAFC 54 (at )), the Court did note:
At  of our earlier judgment we noted 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. However, we do not accept as a proper basis for valuation in accordance with our 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. (emphasis added)
However, while clearly binding on me, this statement did not actually form part of the Court’s main judgment. It follows that the main point to take from this supplementary observation is the qualifier emphasised above. Even the Commissioner expressly accepts that a mid-point selection is appropriate where justified. But, in any event, Mr Longworth took the mean or an average, not simply the mid-point.
89 The Full Court did not reject or endorse any particular method of valuation by which the Spencer test can be applied in valuing a test entity for the purposes of s 855-30(2). Nor did the Court at first instance. It did not hold that the DCF method (preferred by the experts and by the Court at first instance for SBM) was the methodology always to be applied to other test entities for the purposes of ascertaining their market value for the purpose of s 855-30(2). What the Full Court rejected as a proper basis for valuation was the ‘unsupported and speculative proposition’ that market value of mining information and plant and equipment should be assessed as the mid-point between the replacement and scrap values of those assets. Implicitly, some satisfactory reasoning would be required before adopting such a method of assessment. In this case, reasoning was supplied and the Tribunal was clearly content with the reasoning. The legislature has not seen fit to be prescriptive about the process, presumably being content to allow experts in this complex area to guide decision-makers.
The Spencer test does not prescribe a methodology by which the value of an asset is to be determined, provided that the methodology adopted is apt to determine the hypothetical amount at which a sale would occur in the context in which the valuation is required. An “unsupported and speculative proposition” would not be apt to produce an amount contemplated by the Spencer test for the reason explained by McKerracher J, namely, that it lacked “satisfactory reasoning”. But a “re-creation cost” of an asset may be an acceptable method of valuation in an appropriate case (see AP Energy at 104).
111 The application of the Spencer test can be intensely complicated in the context of Division 855. The task requires identification of all of the assets to be valued, and for them to be valued in the context of determining whether the sum of the market values of the non-taxable Australian real property (non-TARP) assets exceed the sum of the assets or vice versa. It is fundamentally an inquiry into commercial value and should be undertaken with that in mind. That, no doubt, is a reason why the Full Court in RCF III rejected as permissible a determination of the market value of the assets upon a valuation of each asset as if it were the only asset offered for sale. The purpose in application of the Spencer test in the context of Division 855 is to capture for tax the market value of assets where the market value of TARP assets exceed the market value of non-TARP assets and that is not achieved by assumptions which are unlikely to achieve that purpose, or which, as the Full Court explained in RCF III (No 2), was on unsupported or speculative propositions.
112 The Court is not well placed to resolve theoretical differences between competing experts whose judgments are soundly based and are responsibly held within established disciplines in areas of non-legal expertise: see Bronzel v State Planning Authority (1979) 21 SASR 513, 523. It is common to find different opinions reasonably held in established disciplines, fields of learning, and areas of expertise which cannot be resolved by courts of law, and, as Wells J cautioned in Bronzel at 523, a judge should not be cast in the role of a third valuer. In Riverbank Pty Ltd v Commonwealth (1974) 48 ALJR 438 Stephen J observed at 484 that even the first step of selecting sales of properties thought to be sufficiently comparable may be attended with difficulty explaining why “the stuff of valuation” was “an art, not a science”. Ultimately, however, a court needs to be persuaded that one or other of the opinions is to be preferred by reference to the explanations and reasons given by the experts for their opinions.
113 The netback method adopted by Mr Pendergast sought to undertake the kind of valuation required by Spencer in the context where there was no observable market for the particular assets. Mr Samuel in cross-examination accepted that there was no observable market for the ore as mined and that there were no sales of the mining leases but, however, the assets to be identified and valued included mining leases and the minerals which were extracted and subsequently processed. The methodology undertaken by Mr Pendergast and Mr Hine was to calculate the separate values of the upstream and downstream operations on a discounted cash flow basis taking as the base the actual sales of the final or processed products produced by the processing plants to hypothesise a “Spencer valuation”; that is, to hypothesise what a willing but not over anxious purchaser would have to offer to induce a vendor to sell the asset at a point in the production process. That is an acceptable, reasonable and reliable application of the Spencer test where there is no other with a stronger claim to producing a more reliable hypothesis.
114 The competing valuation by Mr Samuel, upon the instructions he was required to make, did not determine the amount which a willing but not anxious purchaser would have to offer to induce a willing but not anxious vendor to sell the mining leases. Mr Samuel’s opinion was that the “netback method” had purported to apply the Spencer test by a method which he considered to be artificial and which he considered required hypothesizing non-existing entities. Mr Samuel’s opinion in this regard was set out at [3.20] of the joint report as follows:
The Netback Method
3.20 In Mr Samuel’s opinion:
(a) the Netback Method is employed only because Mr Pendergast has assumed a Valuation Point as a consequence of his instructions;
(b) the Netback Method is unnecessary as the entity and its assets can be valued without it;
(c) the Netback Method is artificial, in that it requires the entity being valued to be separated into two non-existent hypothetical entities and also hypothesises a third hypothetical entity to determine the value of internal costs. Mr Samuel notes that Mr Pendergast does not agree with this conclusion. In Mr Samuel’s opinion, the Netback Method is artificial in any event as it artificially requires the value being derived from one asset, (being the mining rights), to be transferred to an asset that doesn’t exist (being the Greenbushes Downstream Residual);
(d) the consequence of creating two non-existent hypothetical entities, or an artificial Valuation Point, is that the methodology then creates an unexplained and non-existent asset which Talison does not own and which Mr Pendergast labels a “Greenbushes Downstream Residual”. This hypothetical asset:
i. does not satisfy the requirements for either a tangible or intangible asset and does not exist;
ii. could not be ascribed a market value under the principles of RCF III as there is no asset which a willing but not anxious buyer could acquire from a willing but not anxious seller. Nevertheless, Mr Pendergast ascribes a value of $70.738 million to it;
iii. could not be a separate asset as there are no cash flows which can be attributed to it. The cash flows artificially attributed to the Greenbushes Downstream Residual should be attributed to the Mining Leases, as Mr Pendergast did in the EY PPA Report;
iv. has not been explained. In Mr Samuel’s opinion, no sound basis has been provided to explain why a hypothetical non-existent downstream operation would have a residual asset with a market value of $70.738 million. In Mr Samuel’s opinion, this unexplained surplus value arises due to the misapplication of fundamental valuation principles, see Section 8; and
v. if set aside, but assuming all other inputs to the Pendergast’s Case 1 valuation to be correct, would have the consequence of Talison’s TARP assets exceeding 50% of the gross value of all assets, as the $70.738 million exceeds the $33 million identified in paragraph 3.19 above.
Mr Samuel adopted what he called “the market approach” although referring to his approach by that description should not be taken as a finding that Mr Samuel’s approach is accurately, or best, described by those words. It was also referred to in the proceeding as the “top down approach”, the “top down residual approach”, and the “modified top down approach”.
115 Mr Samuel’s approach was essentially to commence with the price in the actual sale of the shares and interests at about the valuation date and to make adjustments to that price as follows:
7.26 The market approach values a business or asset by considering comparable transactions in the market either by reference to transactions involving comparable businesses or to the market price of transactions in its securities.
7.27 In this instance, the Valuation Date coincides with an actual transaction for the shares in Talison being the acquisition of the shares by Windfield on the Valuation Date. That offer was made prior to the acquisition date and was therefore known prior to the Valuation Date.
7.28 Mr Samuel has reviewed all of the information provided to him, including the financial statements of Talison, Windfield and RCF IV, as well as press releases. Having regard to the definition of market value (which requires knowledgeable, willing but not anxious parties acting at arm’s length) he has not identified any matters that would lead him to conclude that the shareholders in Talison (as sellers) or Windfield (as buyer):
(a) were not knowledgeable. Mr Samuel notes here that Windfield was a wholly owned subsidiary of Chengdu Tianqi Industry (Group) Co. Ltd, (Tianqi) which had been a major customer of Talison and a minority shareholder in Talison. Tianqi also states on its website that it had, since 1997, managed to establish China's most advanced lithium intensive processing chain and secured a large share in the lithium battery market. Mr Samuel concludes that Tianqi was knowledgeable about the industry and likely to have had considerable knowledge about the Talison operations;
(b) were unwilling or anxious; or
(c) were not acting at arm’s length. Talison was listed on the Toronto Stock Exchange and could reasonably be expected to be seeking the maximum price it could achieve from any acquisition offer. In doing so, it obtained reports from Ernst & Young as to whether the offers from Rockwood and then Windfield were fair to shareholders. Whilst Tianqi had been a minority shareholder in Talison and therefore related to Talison, its holding up to 25 September 2012 was less than 1% of Talison shares on issue. Its website identifies it as being a private company headquartered in Chengdu. Its offer to acquire all the shares in Talison followed an offer from Rockwood Holdings Inc, a company previously listed on the New York stock exchange. The acquisition was therefore conducted in a competitive environment. Mr Samuel concludes that the transaction was conducted at arm’s length.
Market approach calculation
7.29 Windfield acquired approximately 22.878 million shares (or 19.9%) prior to 26 March 2013 on market and therefore at a price lower than the offer price for takeover purposes of CAD $7.50 per share. It acquired the remaining 91.523 million shares (or 80.1%) at CAD $7.50 per share as well as 350,556 options at CAD $3.95 each on 26 March 2013.
7.30 In order to value 100% of the equity, it is necessary to determine the control price for all shares. As nearly 20% of the shares were acquired for less than the control price (having been acquired on market), Windfield’s actual consideration for all shares will be less than the control value for all shares. Mr Samuel has calculated below the control value using the AUD/CAD exchange rate used by Windfield at the Valuation Date of 1.0681.
7.31 The control value for all equity was $804.4 million, calculated as follows:
7.32 The enterprise value of a business is equivalent of the value of its equity plus the value of its debt. On this basis, Talison’s enterprise value was $829.736 million, calculated as follows:
7.33 The enterprise value determined above is equivalent to the NPV of cash flows to be derived from the Talison operation plus/(minus) any surplus assets/(liabilities).
7.34 In Mr Samuel’s opinion, it is also appropriate, as a cross check, to consider an income approach using the DCF methodology, as:
(a) the company had prepared a detailed LOM model at or around the Valuation Date; and
(b) a DCF valuation provides a useful cross-check on whether the actual acquisition price might have been inflated for any reason (such reasons being synergies available only to the acquirer, for example).
7.35 Whilst the Windfield financial statements was not the starting point for Mr Samuel’s valuation, in Mr Samuel’s opinion the Windfield financial statements will, to a certain extent reflect the actual transaction that occurred, as they will reflect the actual consideration paid by Windfield for Talison and the allocation of that consideration to the net assets acquired/created as a result of the acquisition. Whilst the allocation of the consideration between assets and liabilities is based on accounting standards and not TARP rules, the value of the net assets is based on the market transaction that occurred.
7.36 Mr Pendergast’s starting point is the total value produced by the DCF Model. He then adjusts these assets to arrive at total assets of $944.207 million by adding
(a) $12.5 million for resources not included in the DCF Model;
(b) intercompany loan assets of $94.233 million;
(c) intangible assets relating to software of $4.973 million; and
(d) a Goodwill asset of $8.328 million.
7.37 The goodwill asset has been calculated by:
(a) deducting the liabilities recorded in the Windfield financial statements and the intercompany loans of $94.255 million, from the total assets calculated as described in paragraph 7.36; and
(b) deducting net assets from the acquisition price of $790.095 million.
7.38 The intercompany loan addition is addressed in section [x] below. Mr Pendergast has been instructed to add in this value so, for the purpose of further analysis in this section of the report, Mr Samuel has ignored it.
7.39 The following table compares the assets and liabilities:
(a) recorded in the Windfield financial statements;
(b) as per Mr Pendergast’s opinion (prior to TARP allocations); and
(c) as per Mr Samuel’s opinion (prior to TARP allocations)
7.40 As the table above shows the total assets (excluding intercompany receivables) recorded by Mr Pendergast and Mr Samuel vary by $8.834 million comprising a variance in the value of the mineral assets of $10.708 million and a variance in the value of plant and equipment of $6.454 million, offset by the goodwill asset of $8.328 million in Mr Pendergast’s valuation.
7.41 The variance in the total value of mineral interests primarily arises as a result of the different methodology used by each Expert. Mr Samuel has used a residual value methodology starting with the value of the total assets based on the market transaction and deducting all individual tangible and intangible asset values to arrive at the residual value allocated to the mineral interest. Mr Pendergast has used as a starting point his DCF model and deducted tangible assets to arrive at the mineral interest value.
7.42 In Mr Samuel’s opinion there is no goodwill asset at the Valuation Date. Mr Samuel observes that a goodwill asset was not recorded in the Windfield financial statements. In Mr Samuel’s opinion if Windfield (or Mr Pendergast whilst completing the EY PPA Report) had considered that goodwill existed at the Valuation Date then the accounting standards allowed for the recognition of this goodwill in the Windfield financial statements. The Windfield financial statements do not record any goodwill relevant to the acquisition. Mr Samuel discusses the creation of the goodwill asset further in Section 11 below.
Mr Samuel’s conclusion was also based upon different assumptions and upon different views from those of Mr Pendergast and Mr Hine. Amongst the assumptions Mr Samuel was asked to make were (a) that the general purpose leases and the miscellaneous licence were included in the assets to be determined within the definition of “mining, quarrying or prospecting right”, (b) that Talison Lithium was entitled as a right to renew each of the mining leases and that upon renewal each of the leases and miscellaneous licence would enure for the life of the mine; and (c) that the plant, equipment and fixtures formed part of the realty for the purposes of valuation.
116 The Spencer test necessarily involves some degree of hypothesising as was explained in Spencer at 432:
In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring “What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?”. It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the·then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.
The hypothetical price contemplated by the Spencer test must, of course, be reliable and not be speculative, but it may require assumptions to be made for the hypothetical price to be determined. The approach taken by Mr Pendergast, on the methodology proposed by Mr Hine, determines such a price whilst the approach adopted by Mr Samuel, on the instructions he was given, does not. Mr Samuel’s approach had been, rather, to take the value of the enterprise as calculated by reference to the actual sale of the shares and to adjust that figure.
117 Mr Pendergast’s calculations, as mentioned, were undertaken on two bases, namely, on the basis that the Greenbushes mining leases enured for the full length of the life of the mine (Pendergast Case 1) and on the basis that the Greenbushes mining leases enured only for the remainder of their current term to 2028 (Pendergast Case 2). Mr Pendergast valued the Greenbushes lithium project on the life of mine model sourced from the Talison Lithium management to be in the range of $679.107 million and $745.631 million with a midpoint value of $712.369 million applying a nominal ungeared post tax discount rate range of 11.5% to 12.5%. Mr Pendergast applied the netback method as had been proposed in the report by Mr Hine to determine the Greenbushes upstream value at the valuation point upon the assumption that the relevant minerals became the property of the miner and were chattels after extraction from the ground. The calculation undertaken as proposed by Mr Hine took into account: return on and of capital invested in the processing assets; internal operating costs for the ongoing operation of the processing assets; third party costs; administrative activities; and marketing activities. Mr Pendergast’s calculation of the value of the Greenbushes upstream value for the full length of the life of the mine in Pendergast Case 1 was valued at $460.775 million. The value under Pendergast Case 2 (that is, assuming that Greenbushes mining leases enured only for the remainder of their current term) was assessed by Mr Pendergast to be at $355.404 million. To these amounts (representing the calculation of the value of the reserves) Mr Pendergast added an amount representing the value of the resources and the exploration potential under Pendergast Case 1 and subtracted in both cases amounts attributable to upstream plant and equipment, and mining information. Those figures had been sourced from the Behre Dolbear report previously referred to. No additional amount was included under the calculation in Pendergast Case 2 on the assumption that the Greenbushes mining leases only enured for the remainder of the current term. The mining leases were thus calculated by Mr Pendergast under Case 1 at $436.573 million and under Case 2 at $318.701 million. Mr Pendergast then determined the component of the value of the Greenbushes lithium operations that was downstream of the valuation point. That required him to identify the value of the Greenbushes lithium operations that formed part of the overall value of the downstream operations which had not been separately valued (“the downstream residual”). That was calculated by Mr Pendergast by deducting the tangible and intangible assets incorporated into that value from the value of the Greenbushes lithium operations. The downstream residual was calculated in both cases at $70.738 million based in part upon the value of plant and equipment sourced from a report by Mitchell Munn dated 27 November 2015 of intangible assets assessed at market value. Mr Pendergast added the amounts he had calculated for the value of the Greenbushes lithium operations reserves and the Greenbushes resources and subtracted from the amounts calculated for the Greenbushes mining leases, an amount for an intangible asset as the value beyond the mining leases, mining information, property plant and equipment and inventories. The amounts calculated under Case 1 and Case 2 were $70.738 million with the differences being reflected in the amounts taken into account by Mr Pendergast for the Greenbushes mining leases and the intangible value beyond mining leases.
118 It is not necessary to consider in detail all of the differences between Mr Pendergast and Mr Samuel, or those between Mr Samuel and Mr Hine. For present purposes it is sufficient to make some general observations as to why the expert evidence of Mr Pendergast and Mr Hine was preferred to that of Mr Samuel. The earlier conclusion that the general purpose leases and the miscellaneous licence did not come within the definition of “mining, quarrying or prospecting right” required their exclusion in the calculation of the value of the mining leases contrary to the approach taken by Mr Samuel upon instruction. Mr Samuel’s valuation effectively included the value of the processing and production operations after the point at which the minerals were extracted and had become the property of Talison Lithium. He thereby included that which in Mr Pendergast’s terminology was the value of the downstream operations with the result of an overstatement of the value of the assets constituting the taxable Australian real property for the purposes of Division 855. Mr Samuel’s approach had also relied in part upon a contested understanding of the views expressed by Mr W Lonergan in his book The Valuation of Mining Assets (2006, Sydney University Press). In chapter 15 of that book Mr Lonergan discussed valuation methodologies that were available when it was necessary to separate the value of upstream and downstream mining assets. Mr Lonergan described one of those methods as the “top-down residual method” which involved subtracting the market value of fixtures and chattels from the purchase consideration but, at 140, Mr Lonergan went on to caution that the method had the weakness that any error in calculating the components of value had a flow on effect to the value of the residual. Mr Lonergan went on to explain that for that reason it was “common practice to value the ore body using the sharing of economic returns approach” which “notionally” separated the economic activities of the mining and processing operations and treated the mined ore as a product that the mine sells and as a raw material that the processing plant purchases. The difficulty with the approach adopted by Mr Samuel, however (consistently with the instruction he was given by the Commissioner, and as Mr Samuel agreed in cross-examination), was that he undertook a valuation which was consistent with the top-down residual method, but had done so in circumstances of valuing the entire operation rather than having separated the mining activities from the subsequent processing activities. One consequence of that was that his calculation did not adopt a different beta to determine the required rate of return by reference to the weighted average cost of capital. The point being made by Mr Lonergan, but not taken up by Mr Samuel in light of the task as he was required to undertake it, was that different beta figures were required when determining the required rate of return for mining than for subsequent activity.
119 The instructions to Mr Pendergast and Mr Samuel differed also about the approach to be taken as to whether Talison Lithium had an automatic right to renew the mining leases and the general purpose leases at the valuation date. The leases themselves were for a period of years and s 78 of the Mining Act gave the holder of a mining lease an entitlement to a renewal after the first term of 21 years but not for any term thereafter. Section 78 provided:
78. Term of leases, options and renewals
(1) Subject to this Act, a mining lease shall remain in force —
(a) for an initial term of 21 years; and
(b) where application for renewal is made in the prescribed manner during the final year of the term of that lease or if section 111A(1)(d) applies, as from the expiry of the preceding term for a further term of 21 years, as of right but subject in respect of that further term to the provisions of this Act and the regulations thereunder as in force on and after the date of renewal.
(2) Subject to subsection (1), the Minister may, from time to time upon receipt of an application made in the prescribed manner, renew or further renew a mining lease for successive terms but so that no such term exceeds a period of 21 years.
(3) If an application for renewal is made under this section and the term of the lease would but for this subsection expire, that lease shall continue in force in respect of the land the subject of that application until the application is determined.
(4) If, after an application for renewal is made under this section —
(a) the holder of the mining lease transfers the lease; or
(b) where there are 2 or more holders of the mining lease, a holder transfers the holder’s interest in the lease,
the application continues in the name of the transferee of the lease or interest as if the transferee were an applicant or one of the applicants, as the case requires.
Mr Samuel explained in the joint report at paragraph 2.10(d) that he had been instructed to assume that, as at the valuation date, Talison Lithium “was entitled as of right to renew each of the mining leases and general purpose leases at the end of their current terms”. However, s 78(1)(b) permitted an as of right renewal only for the first renewal of a lease and not thereafter. That instruction weakens the reliability of the conclusions reached by Mr Samuel and strengthens the report of Mr Pendergast who was specifically instructed to value the mining leases on the alternative basis of the mining leases enuring for the full length of the life of the mine, and of the Greenbushes mining leases enuring for the remainder of the life of the mines. The Commissioner’s contrary submission, that whether or not the mining leases were renewable at the discretion of the Minister was immaterial, cannot be accepted in light of the terms of s 78. It is true that the legislation makes the general purpose leases and miscellaneous licence renewable by the holder upon application to the Minister but Mr Samuel’s valuation was required to assume a legal state of affairs inconsistent with the statutory provision that did not give certainty to renewal upon the expiration of the first period of renewal. All of the mining leases in question had been renewed at the date of valuation and there was no longer an entitlement as of right to the renewed leases.
120 The consequence of accepting the expert evidence of the applicants is that their membership interest (as defined by s 960-135 of the 1997 Act) will not have passed the principal asset test in s 855-30 because the market value of the assets in Talison Lithium that were taxable Australian real property assets did not exceed the sum of the market value of its assets that were not taxable Australian real property assets, unless any asset with a market value of $33 million or more was incorrectly assumed to be a non-taxable Australian real property asset. Messrs Pendergast and Hine applied a methodology to calculate the separate values of the assets in the upstream and the downstream operations. Mr Pendergast was correct to value the downstream operations as instructed, namely, that a mining licence was not required or necessary to undertake any of the activities after extraction of the minerals from the ground. On that basis it was correct for him to opine that any value arising after the point of extraction should not be attributed to the mining leases. The value of the mining leases was calculated on a discounted cash flow basis as was agreed by all of the experts, including Mr Samuel, to be the appropriate methodology for determining its value, although the basis of calculation of the cash flows were adjusted to take into account that the actual cash flows were generated from the combined operations.
121 The percentage of taxable Australian real property under Pendergast Case 1 was 46.5% and under Pendergast Case 2 was 34%. In both cases it is less than the non-taxable Australian real property assets and it is therefore unnecessary to decide between them unless, as mentioned above, one or more assets with a market value of $33 million or more was wrongly assumed to be non-taxable Australian real property (non-TARP). Mr Samuel calculated the consequence of the incorrect inclusion of assets as non-taxable Australian real property in a table in the joint report as follows:
The summary went on to identify the total assets comprising the gross market value of the individual assets as follows:
The two remaining issues of the five which were identified by Mr Samuel as the basis upon which the taxable Australian real property outcome appears to turn were: whether the cash flows after 2028 can be attributed to an asset other than the mining leases which Mr Pendergast labelled as “VBML intangible”; and whether the intercompany receivables should be taken into account as Mr Pendergast had done.
122 The values of the Greenbushes mining leases which were calculated by Mr Pendergast under Case 1 and Case 2 had differed by an amount of $117.872 million, but in calculating the Greenbushes downstream residual under Case 2 Mr Pendergast took into account an intangible asset for the value beyond the mining leases of $117.871 million (presumably rounded down). Mr Pendergast explained this “asset” in the joint report as relating to the cash flows from the operation of the Greenbushes mine beyond the expiry of the current leases in 2028. Mr Samuel took issue with the treatment of this intangible as an asset properly so called under accounting principles, and Mr Pendergast accepted in cross-examination that the intangible was an expectation of cash flows after the date of the expiry of the mining leases after 2028 that was not in the control of the person holding it as an expectation and that it therefore could not strictly be treated as an asset. That answer was consistent with his explanation of the intangible in the joint report at 7.12 as follows:
7.12 Under Pendergast Case 2, reflecting Mr Pendergast’s instruction that the Greenbushes Mining Leases enure only for the remainder of their current term, he separately identified the value attributable to Greenbushes beyond 2028. In this regard, the VBML Intangible represents the net present value of the forecast cash flows beyond 2028 plus the Greenbushes – Resources (refer Section 9). The determination of the VBML Intangible is summarised as follows:
The differences between Mr Pendergast and Mr Samuel in relation to the intangible “asset” were set out in some detail in the joint report at 9 as follows:
9. Valuation of right to renew Mining Leases beyond 2028
9.1 Under instruction, the Pendergast Case 2 was completed on the assumption that the Greenbushes Mining Leases effectively expire at 30 June 2028. Consistent with the follow-on assumption from Mr Pendergast’s instructions that, the principal value of a mining lease is the right to extract minerals from the ground, under Pendergast Case 2, the Greenbushes Mining Leases have lower value than under Pendergast Case 1. The differential between the value of the Greenbushes Mining Leases under each case has been classified within the Pendergast Case 2 as the value beyond the Greenbushes Mining Leases (i.e. the VBML Intangible). The expiry of the Greenbushes Mining Leases in 2028 does not mean that there is no value remaining at that time, it is the right to extract the minerals which is no longer current. Without the right to extract the mineral, the VBML Intangible is, as a consequence of Mr Pendergast’s instructions, is not part of the value of the Greenbushes Mining Leases and is considered to be Non-TARP.
9.2 The VBML Intangible is underpinned by the forecast cash flows beyond 2028 and carry the expectation, but not the right, that the holder would obtain access to the remaining resources at a future date which will enable the holder to benefit from the expected cash flows. The value is separable from the Greenbushes Mining Lease.
9.3 Also included within the VBML Intangible under Pendergast Case 2 is the $12.5 million assessed in the Behre Dolbear Report as representing the resources and the exploration potential pertaining to the Greenbushes Lithium Operation. On the assumption that the Greenbushes Mining Leases only enure for the remainder of their current term and that any exploitation of these resources and/or exploration potential would only occur beyond 2028, the value therefore falls outside of the value of the Greenbushes Mining Leases. Under Pendergast Case 1, this value is included in the value of the Greenbushes Mining Leases as the “Greenbushes Upstream Value – Resources” component.
9.4 Mr Pendergast, in his Case 2 valuation, has valued an asset that he describes as the VBML Intangible at $117.871 million (which includes $12.5 million relating to the Greenbushes Resources, see Section 9).
9.5 As a result of Mr Samuel’s instructions, any value relating to cash flows from the renewal of the existing leases are a TARP asset. In Mr Samuel’s opinion the VBML asset relates to the mineral assets and is TARP.
9.6 As a valuer, Mr Samuel is unable to identify any asset other than the mining leases to which these cash flows could relate. In his opinion, this value should be attributed to the Mining Leases. If the value is attributed to the Mining Leases, the VBML Intangible would be a TARP Asset.
9.7 In Mr Pendergast’s Case 2 valuation, Mr Pendergast reclassified the Greenbushes Resource Value of $12.5 million from a TARP asset to a Non Tarp asset. The cash flows from this asset, which predominantly relate to mining exploration assets and is sourced from the opinions given in the report of BDA dated 22 October 2012 are not captured in the LOM Model. Mr Pendergast’s reasoning for this is that the cash flows relating to this asset would fall beyond 2028.
9.8 Mr Samuel has been instructed that
“at the Valuation Date Talison was entitled as of right to renew each of its mining leases and general purpose leases at the end of their current terms. In particular, in the case of the mining leases, if Talison applies in the prescribed manner to renew the lease during the final year of the current term of that lease, the mining lease will remain in force for a further term of 21 years: Mining Act 1978 (WA), s 78. A similar regime applies for general purpose leases and miscellaneous licences granted under the Mining Act 1978 (WA): s 88, 91A and 91B. Further:
i. with any necessary renewal, Talison’s mining leases, general purpose leases and miscellaneous licence (being TARP assets) will enure for the life of the mine; and
ii. if I consider that, under the valuation principles referred to at paragraphs  to [ ], the right of renewal is a separate asset to which a separate value should be ascribed, it is nevertheless a TARP asset under paragraph (d)(ii) of the definition of the “mining, quarrying or prospecting right” set out at paragraph [ ]”
9.9 It follows from Mr Samuel’s instructions that the $12.5 million Greenbushes Resources asset which relates to cash flows that will flow from the sale of mineral assets in the ground as at the Valuation Date, is a TARP asset.
There is some force to Mr Samuel’s view, and to the Commissioner’s submission, that the intangible value beyond the mining leases after 2028 be referrable to the mining leases because, in a general sense, the value of the intangible was made possible by the leases. The value of the intangible, however, represented the net present value of the future cash flows beyond 2028 and the assumption made in Pendergast Case 2 was that the leases expired in 2028. On that basis, there would be residual value beyond 2028, as Mr Pendergast explained, but it would not be referrable to the leases which (upon the assumption) had expired in 2028. Accordingly, the intangible was property allocated as an amount that was not a taxable Australian real property asset.
123 There was also substantial disagreement between the valuers and the parties concerning the intercompany loan accounts which had been taken into account by Mr Pendergast but not by Mr Samuel. Each was cross-examined and the issue continued to be the subject of dispute. Mr Samuel had not included amounts for intercompany loans as can be seen from the table above. The Commissioner’s submissions on this point were ultimately that “the Court ought not [to] be persuaded that [the] company loans existed at the valuation date”, however the unchallenged evidence of Mr Pendergast had been that he calculated the intercompany loans as having a value of $94.233 million and that he had done so by reference to the accounting records of the Talison group. The amended written submissions for the Commissioner described “the common position adopted by the valuers” after Mr Pendergast had given evidence as being that “while the intercompany loans continued to exist, considered together with the shares in the entity that owed the loan, they netted out to nil”. The issue for the Court on this aspect of the dispute was not which fact was correct, but whether the opinion of the expert was reliable upon the assumptions which had been made. There was no basis for the Court to find that the assumption was not properly made and, accordingly, there is no reason not to accept the basis upon which Mr Pendergast opined. At the relevant time s 855-30 required regard to be had only to the market value of assets of the test entity and of each subsidiary of the test entity and did not require regard also to liabilities whether netting out or otherwise. The provision was subsequently altered by the insertion of s 855-32 of the 1997 Act but that provision did not apply to the transactions in question.
124 It is otherwise unnecessary to consider in any more detail many of the specific aspects of the valuations challenged by the Commissioner. The Court is not obliged simply to adopt one of the valuers’ opinions (see McKay v Minister of Main Roads (No 7)  WASC 223, ) but the judge must not take over the role of valuers. In Bronzel v State Planning Authority (1979) 21 SASR 513 Wells J said at 523:
…[T]he judge must never allow himself to be cast in the role of a third valuer, or of primus inter pares. Valuers have their training, their learning, their experience, their art, and their skill, and must use it all according to the best of their ability and the precepts that guide their profession. The judge cannot take over their role.
A number of criticisms made on behalf of the Commissioner about elements of judgment made by the valuers are of the kind contemplated by Bronzel as being for the valuer rather than for the judge. Thus, for example, the Commissioner was critical of an element adopted by Mr Hine in his judgment in calculating the netback charge on the basis of an assumption that the processing assets of Talison Lithium as at 2013 were not then new. Mr Hine accepted in cross-examination that the processing assets of Talison Lithium as at 2013 were not then new and that his approach in using a replacement with a new method resulted in calculating a return on capital which was different to the assets actually owned and operated in 2013. Mr Hine’s explanation was based upon an assumption that a notional “downstream” operator and notional “upstream” operator had a long term contract in place from 1996 which would result in a difference of only 1.5% in the netback charge, depending on which values of the downstream assets were used. That, and the adoption of 2013 replacement values, were matters for the expertise of valuers and not of law.
125 The parties foreshadowed during the hearing that some of the findings and conclusions may require the experts to undertake some recalculations. There is also the question of the impact upon the form of orders of the issue raised between the parties in proceeding NSD 1238 of 2016. Accordingly, the proceedings will be relisted for the parties to be heard in relation to the form of orders, and on any matter flowing from these reasons, and subject to hearing from the parties, the appeal will be allowed with the objection decision being set aside and remitted to the Commissioner for reconsideration in accordance with these reasons.