Australia: Investment via limited partnership falls out of double tax treaty

Last Updated: 24 September 2014
Article by Selwyn Black

The 2014 G-20 Heads of Government Summit in Australia follows other 2014 G-20 meetings in Australia, including meetings of finance ministers, trade ministers and central bank governors. On the agenda is the contribution of trade agreements towards economic growth. Australia is a party to free trade agreements with the United States, New Zealand and Korea, and it recently concluded an economic partnership agreement with Japan.

These treaties, along with applicable double tax treaties, form an important part of the framework for cross border dealings. They also increase uniformity of treatment, but some differences remain.

This article focuses on the 2014 Australian Full Federal Court decision in Commissioner of Taxation v Resources Capital Fund III LP, which involved consideration of the Australian/United States double taxation treaty, as well as principles for valuation of business components.


The Resources Capital Fund III Limited Partnership (RCF) was a Cayman Islands limited partnership with a Cayman Islands general partner. Almost all of the limited partners were U.S. residents. The partnership invested in an Australian company, St. Barbara Mines Limited (SBML). RCF sold the shares in SBML for a gain of over $58 million. The Australian tax authorities wished to tax that gain on the basis that the sale resulted in a capital gain liable for tax in Australia.

At this point it is important to note that with some exceptions (including for certain venture capital limited and management partnerships), corporate limited partnerships are treated as taxable entities under Australian law even though for United States tax purposes they may be regarded as tax transparent (i.e. the partners rather than the partnership being assessed to tax).

The Australian Taxation Office (ATO) assessed RCF under Division 855 of the Australian Income Tax Assessment Act 1997, which applied Australian tax to a foreign resident on a capital gain on the sale of shares in an Australian company only if the shares were an "indirect Australian real estate property interest," which in turn required that the shares constitute a greater than 10 percent interest in the company and that the sum of the market value of the company's assets that are taxable Australian real property (TARP) must exceed the market value of the company's non-TARP assets. TARP assets include real property and mining rights in Australia.

Note that a different regime would apply where the foreign resident has used an Australian permanent establishment.

The Valuation Issue

The assets of SBML included mining rights (which constituted TARP), and mining information together with the plant and equipment (which was not TARP).

The trial judge suggested that the correct valuation approach was to value separately each category of assets as if it was the only asset offered for sale in a transaction. However on appeal the full Federal Court preferred to measure the market value of the individual assets on the basis that they "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." This meant that a hypothetical purchaser of the TARP assets might expect to acquire the mining information and the plant and equipment for less than their production or acquisition costs and without material delay. This reflects the reality that information and plant will generally be sold to the purchaser of the relevant mine. The result was that the TARP assets exceeded the non-TARP for a least one relevant date, and the transaction was taxable, subject to the application of the U.S./Australia double tax treaty.

Double Tax Treaty Issue

The general Australian tax laws are subject to inconsistent provisions of relevant double tax treaties. The U.S. limited partners may have had the benefit of protection under the U.S./ Australia double tax treaty if the relevant tax payer was a U.S. resident. As noted, for U.S. purposes the limited partnership was regarded as fiscally transparent (i.e. a pass through situation). However, with some exceptions, Australian tax law treats a corporate limited partnership as a separate taxpayer, generally taxed as if it was a company, so that apart from the treaty Australian tax law would treat the taxpayer as a Cayman Islands limited partnership rather than looking through to the U.S. limited partners.

The trial judge paid heavy regard to the OECD commentary on the model tax treaty on which the Australia/U.S. double tax treaty was based, to find that the U.S. limited partners were the relevant taxpayers, and accordingly protected by the double tax treaty.

On appeal the full Federal Court said that the Australia/U.S. double tax treaty did not apply because RCF (i.e. the taxpayer assessed, being the Cayman Islands limited partnership rather than the partners), was neither a resident of the United States nor a resident of Australia.

Subject to any further appeal or change in the law, one consequence is that where there are TARP assets (e.g. mining rights or real estate), a nonAustralian investor should consider investing directly from an entity in a treaty jurisdiction, to reduce the risk of double tax. In addition, other structures and specific advice should be considered. While the context here is Australia/U.S., similar issues may occur under other double tax treaties where there is an interposed entity or structure, even a fiscally transparent one, with a domicile different to the parties of the treaty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.