Source: Minter Ellison Alert, 20 May 2013
Although not involving stamp duty, the recent case of Resource Capital Fund III LP v Commissioner of Taxation  FCA 363 is a good reminder that the proper valuation of land interests held by mining entities is an important exercise in correctly determining the amount of any landholder or land rich duty payable on acquisitions of interests in the entity. The case also provides some guidance regarding the proper valuation of mining information. These two important points are discussed below.
Valuing land interests for landholder or land rich duty purposesIn broad terms, 'landholder' or 'land rich' duty may apply to acquisitions of interests in companies or trusts that hold Australian land assets. In the case of 'landholder' duty (all jurisdictions except Tasmania), generally duty (at rates of up to 7.25%) is calculated by reference to the value of the company's or trust's 'landholdings' and (for New South Wales, Western Australia and South Australia) 'goods' or 'chattels'. 'Landholdings' generally includes all interests in land, mining tenements and, in some jurisdictions, certain exploration rights or permits. In the case of 'land rich' duty (Tasmania only), generally duty will only potentially apply (at rates of up to 4.5%) if at the time of the acquisition the value of the company's or trust's landholdings comprise 60% or more of the value of all its property.
Resource Capital demonstrates that for landholder and land rich duty purposes, it should not be immediately assumed that a company or trust carrying on mining activities will necessarily be 'land rich' or that its only assets of significant value are 'landholdings'. Further investigation, including a proper identification and valuation of all the entity's assets which, for example, may include intangible non-land assets (such as mining information or goodwill), may reveal that the company is not 'land rich' or that a large proportion of the value of the entity's assets do not constitute 'landholdings'.In Resource Capital, the Federal Court found that an Australian capital gains tax (CGT) liability did not arise for a foreign resident taxpayer on a disposal of shares in the relevant mining company as the value of the company's mining information and other 'non-TARP' assets (essentially plant & equipment) exceeded the value of its 'TARP' assets (essentially mining tenements). Interestingly, the mining enterprise was past the exploration phase and was within its mining phase. Nevertheless, the valuation of the mining information, as an asset separate from the mining tenements, substantially assisted in the company failing the 'TARP test'. The consequence being that the disposal of the foreign shareholder's interest in the mining company was not within the CGT regime. Similarly, for landholder and land rich duty purposes, a proper valuation of mining information and other intangible assets may assist in either a company failing the 60% 'land rich' test (for Tasmania) or a correct identification and separation of the value of non-land assets from the value of the company's landholdings (upon which landholder duty is calculated).
In particular, in Resource Capital the court applied the following process in determining the 'maximum value' of the 'TARP' (or land) assets (mining tenements):
1.Adopted a discounted cash flow method to assess the market value of the company's total assets; and
2. Deducted from 1, the value of identifiable non-TARP assets (which were principally mining information and plant & equipment).
Importantly the court emphasised that the above process needed to comply with the relevant 'TARP test' statutory criterion. That being that the value of each asset was to be determined on a 'stand alone basis' or on the assumption 'that it was the only asset offered for sale.' By contrast, the court suggested that to apportion a going concern value of the business amongst the assets of the business resulted in an 'overstatement of the market values' of those assets, as 'it jumbles the value of the goodwill, or the marriage value of the assets, with its sources.'
It is considered that such an asset-by-asset valuation approach may also be appropriate for landholder or land rich duty purposes. In particular, the landholder / land rich duty provisions in all jurisdictions require a determination of the value of the entity's land interests separate from its other assets or attributes (including the 'marriage value' of its assets).Also central to the valuation process considered in Resource Capital was the adoption of an appropriate methodology for valuing the mining information and plant & equipment. This is discussed in more detail below.
Valuation methodology relating to mining information and plant & equipmentIn relation to attributing an appropriate value to mining information and plant & equipment, the court made some useful observations which may be relevant when determining the amount of duty payable on the acquisition of an interest in a land rich or landholder entity.
In particular, the court observed that, as with the valuation of each of the other assets of the mining enterprise, it was necessary to assume that the mining information or plant & equipment was the only asset offered for sale.The court then went on to observe that based on this assumption, the price for the mining information would be negotiated in a range somewhere between a low point, where the purchaser was not the owner of the mining tenements, and a high point, where the purchaser is the owner of the mining tenements and would need to otherwise recreate the mining information, and it was appropriate to take the mid-point in this range. The court accepted that in relation to the 'high point', the price would equate to the amount of the outlay to recreate the information and the value of loss of cash flow suffered to recreate it.
For the valuation of the plant & equipment, the court adopted a similar mid-point approach. The suggested low point being the price realised on a sale and removal of the equipment by someone other than the owner of the related mining tenements. The high point being the cost to the owner of the related mining tenements of acquiring replacement equipment including the value of loss of cash flow suffered to replace it.Recommendations and Federal Government response
For any investor acquiring an interest in an entity owning Australian mining assets, consideration should always be given to identifying and undertaking a proper valuation of all the entity's assets in order to ensure that the correct amount of any landholder / land rich duty is imposed.
We note that the Federal Government announced on 14 May 2013 that it will amend the income tax laws to ensure that mining information and other intangible assets connected to mining rights will be treated as 'TARP' assets for CGT purposes in the case of CGT events occurring after that date. This seems to be in direct response to this Case.
By John Riley & Marina Raulings