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Taxation of gains derived by foreign residents on non-portfolio interests in mining companies

2 Apr 2012

The Australian Taxation Office (ATO) has recently issued two interpretative decisions1 which provide important clarification on the application of Australia's capital gains tax (CGT) regime in the context of gains derived by foreign residents holding non-portfolio interests in mining companies. The decisions highlight the importance of getting the sale/purchase price allocation right. Taxand Australia discusses the importance of the clarifications of the Capital Gains Tax regime for foreign residents on non-portfolio interests in mining companies.

By way of background, significant reforms were made to Australia's CGT regime, as it applies to foreign residents, in 2006. Pursuant to those reforms, a foreign resident can disregard a capital gain (or loss) on the disposal of shares in Australian company unless:

  • the foreign resident holds more than 10% of the company or has held more than 10% for at least 12 months in the prior two years; and
  • more than 50% of the company's assets (by market value) are represented by "taxable Australian real property". When assessing a company's assets, it is necessary to trace through other entities in which the company has a 10% or greater interest.

Taxable Australian real property is defined to cover:

  • real property in Australia, including a lease over Australian land; and
  • a mining, quarrying or prospecting right if the underlying minerals, petroleum or quarry materials are in Australia.

In the first decision, ATO ID 2012/13, the ATO confirms that mining information is not taxable Australian real property. This is because it is not a CGT asset, but rather more in the nature of know-how, and in any event does not attach to and is distinguishable from the mining, quarrying or prospecting right to which the information relates.2

In the second decision, ATO ID 2012/14, the ATO confirms that for the purposes of the test above, the "assets" of a company include "anything recognised in commerce and business as having economic value to the entity... for which a purchaser of the entity's membership interests would be willing to pay." It follows that this includes information assets, such as mining information, even though these are not CGT assets. Further, it would also extend to valuable contractual rights, intellectual property and any goodwill.

Taxand's Take

Given the value of mining rights are often determined as a residual value in undertaking purchase/sale price allocations, these decisions by the ATO highlight the importance of identifying and fully valuing all relevant assets. As the price allocation will also be relevant to the purchaser from a stamp duty and tax consolidation perspective, consideration should be given to the vendor and purchaser agreeing a process for identifying the allocation of the price amongst underlying assets, as inconsistencies in the approach of the vendor and purchaser might create opportunities for the ATO or state revenue authorities to challenge positions adopted by one or both of the parties.

Your Taxand contact for further queries is:
Reynah Tang
T. +61 3 9672 3535

1 An ATO interpretative decision (ATO ID) is an edited and summarised record of an ATO decision. As it is not a ruling, it does not prevent the ATO reaching a different conclusion for a different taxpayer, although it provides some protection from penalties and interest.

2 In this regard, the ATO refers to Taxation Ruling TR 98/3 and Taxation Determination TD 2000/33.

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