Amounts paid by broadcaster to the IOC were not royalties

On 24 May 2016, the Full Federal Court in Commissioner of Taxation v Seven Network Limited [2016] FCAFC 70 dismissed the Commissioner's appeal against the decision of the Federal Court in Commissioner of Taxation v Seven Network Limited [2014] FCA 1411. In this case, the Federal Court held that amounts paid to the International Olympic Committee were not royalties for the purposes of Article 12(3) of the Australia– Switzerland double tax agreement. As a result, the amounts paid were not subject to Australian withholding tax.

The Federal Court decision at first instance was reported in the 1 February 2015 TaxTalk: Other news Update.

Federal Court dismisses Commissioner’s appeal in AP Energy Investments Limited and Commissioner of Taxation

On 25 May 2016, the Federal Court in Commissioner of Taxation v AP Energy Investments Pty Ltd [2016] FCA 577 (AP Energy) dismissed the Commissioner’s appeal against the decision of the Administrative Appeals Tribunal (AAT) in AP Energy Investments Limited and Commissioner of Taxation [2013] AATA 626. In this case, the non-resident taxpayer had claimed that the disposal of shares it held in an Australian company was not subject to capital gains tax, because the shares disposed of was not an ‘indirect Australian property interest’ for the purposes of Division 855 of the Income Tax Assessment Act 1997.

The appeal concerned several issues, however the primary issue concerned whether the valuation methodology used by the taxpayer and accepted by the AAT to value the ‘mining information’ (such asset not being a ‘real property asset’) of the Australian company departed from established ‘legal tests’. The approach adopted by the taxpayer was to calculate the sunk cost of creating the mining information, less a discount for the availability of the information in the public domain, plus an escalation factor to account for the time delay between incurring the sunk costs and the time of re­creating the information, taking into account the increase in exploration costs over the relevant period, assuming the information was re-created at the relevant valuation date.

Relevantly, the Commissioner submitted that the AAT should have determined the value in accordance with the methodology outlined by the Full Court in Resource Capital Fund III v Commissioner of Taxation [2014] FCAFC 37 (Resource Capital). In the Resource Capital case, which involved the valuation of assets for determining whether the shares sold comprised an ‘indirect Australian property interest’, the Full Court held that the assets of the relevant company should be valued as though they are to be sold as a bundle, simultaneously to the same hypothetical purchaser. This was through application of the test in Spencer v The Commonwealth [1907] HCA 82.

In dismissing the Commissioner’s appeal in AP Energy, Justice McKerracher said that whilst the Full Court in Resource Capital accepted that in a simultaneous sale of the relevant company’s assets, the hypothetical purchaser would expect to acquire the mining information and plant and equipment for less than their re-creation costs, with little or no delay, the Court “did not, however, go so far as to reject any particular methodology for ascertaining the market value of mining information, including a method which used the costs of mining information and other factors”. Accordingly, Justice McKerracher held that it was open to the AAT to compare the evidence from the experts, and to choose a market value of the mining information on a sunk cost methodology.

The AAT decision was reported in the 1 November 2013 TaxTalk: International Tax Update.