The recent Federal Court decision in Commissioner of Taxation v AP Energy Investments Ltd [2016] FCA 577, and the subsequent ATO Decision Impact Statement, mark further chapters in the long running saga of how mining, quarrying or prospecting information should be valued for Division 855 purposes. That is, how should such information be valued in applying the principal asset test in Division 855 to determine whether a company is “land rich” for CGT purposes?

To re-cap:

  • In Resource Capital Fund III LP v FC of T [2013] FCA 363, Justice Edmonds found that the value of the plant and mining information of St Barbara Mines was greater than the value of the land assets (ie the tenements) and that accordingly it was not land-rich. In broad terms, Justice Edmonds found that the value of the information and plant was equal to 50% of their replacement cost by hypothesing that in a notional sale between an owner of these assets and an owner of the tenements the parties would meet half way between replacement and scrap costs. The ATO appealed the valuation issue.
  • The Federal Government subsequently announced that Division 855 would be amended to pick up mining, quarrying or prospecting information and goodwill in the value of mining tenements.
  • In AP Energy Investments Limited and FCT [2013] AATA 626 Senior Member Walsh found, on the evidence before her, that the proper basis for valuing the mining, quarrying or prospecting information of Abra Mining was based on the full cost of replacing that information. In this way, she took a different approach to Justice Edmonds in RCF No. 1, noting that Abra Mining was at the exploration phase (whereas St Barbara Mines was at the production phase). The ATO appealed.
  • On appeal, the Full Federal Court overturned the first instance decision in RCF finding that the proper basis for valuing the mining plant and information was to hypothesise a sale of the whole project in a single sale. RCF’s valuer, for reasons that are not apparent from the judgement, had conceded that in this case the value ascribed to the plant and information would be less than their replacement cost but did not provide an alternative basis acceptable to the Court as to what that value would be – thereby failing to discharge the burden of proof. The taxpayer did not appeal the valuation issue.
  • The Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2014 Measures No. 4) Act 2014 noted that the proposed legislative amendment was to be deferred until the effect of the Full federal Court decision in RCF had been analysed.

Which brings us to the Federal Court decision in AP Energy. At its heart this decision turned on whether there was a legal basis to overturn the AAT decision. In broad terms, Justice McKerracher found there was not, because the findings made by the AAT were open to it on the facts. The ATO did not appeal.

One might assume, following AP Energy, that in valuing the information of an exploration company for Division 855 purposes, replacement cost is an appropriate method. However, the ATO Decision Impact Statement for AP Energy notes “….in our view, the valuation approach that was accepted by the AAT in this case should not be taken to be precedent for the valuation of mining and exploration information where the test entity is either an explorer (as the test entity was in this case) or an active miner.” So it seems clear the ATO is far from convinced that AP Energy is correct.

On the other hand, RCF leaves open the question of how to value mining information of a company in the production phase. In addition, and whatever your views on mining information, RCF also leaves open the proper value of mining plant. It simply cannot be right that no or little value can be ascribed to the plant of a profitable mining company in the production phase, but RCF provides no clarity on what the true value should be.

In a consultation forum the ATO recently highlighted that the Explanatory Memorandum noted above did not rule out a legislative change if it was subsequently determined as being necessary. Watch this space for the next instalment!