Australian ruling clarifies some PE tax issues

Australia’s Federal Court has ruled on a tax case involving US private equity firm Resource Capital and its investment in an Australian mining company.

The Australian Federal Court has provided more clarity on some tax issues affecting private equity after ruling in a recent court case involving Denver, Colorado-based Resource Capital, according to a report from King & Wood Mallesons in Sydney.

The court considered whether a Cayman Islands limited partnership structure was subject to capital gains tax after Resource Capital exited Australian mining company St Barbara Ltd. 

The court ruled that the tax office is prevented from assessing the limited partnership itself and tax authorities are required to look behind the limited partnership to the partners to determine if any are from countries that do not have double tax agreements with Australia.

The ruling has the potential to make it more difficult for the tax office to actually assess private equity, so we expect it may try to appeal this decision

Scott Heezen
partner
King & Wood Mallesons

“The tax office previously looked to the limited partnership as being subject to tax in Australia,” says Scott Heezen, partner at King & Wood Mallesons. “What the court said was the tax office in each case couldn’t assess a limited partnership because it was a `tax transparent entity’ and it therefore needed to look to the partners.”

In the same case, the court also noted an exemption from Australian capital gains tax in relation to Australian land holding (“land rich”) entities, which includes mining companies. 

The court said the exemption was available because the underlying shares in the Australian company weren’t land rich. 

“The tax office has been launching assessments on a number of entities that are disposing interests in Australian mining companies,” Heezen explained. “[Tax authorities] are saying in most cases those entities are land rich.”

“However this [ruling] says that won’t always be the case and it is important for tax authorities to go and evaluate the underlying assets of each company to reach that conclusion.”

Heezen continued: “The tax office continues to pay close attention to private equity, particularly its exits. The ruling has the potential to make it more difficult for the tax office to actually assess private equity, so we expect it may try to appeal this decision.”