AP ENERGY INVESTMENTS LTD v FC of T

Members:
CR Walsh SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2013] AATA 626

Decision date: 3 September 2013

Senior Member C R Walsh

2 September 2013

INTRODUCTION

1. Under Subdivision 855-A of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ), foreign residents are subject to Australian capital gains tax ( CGT ) only where a CGT event, that 'happens' on or after 12 December 2006, 'happens' in relation to "taxable Australian property", which includes direct or indirect interests in Australian real property and certain mining rights: s 855-10(1) of the ITAA 1997.

2. This particular application concerns whether Chinese company, AP Energy Investments Limited ( AP Energy ), is allowed to disregard the capital gain on the part disposal of its shares in Australian company, Abra Mining Limited ( Abra ), on 3 December 2007, pursuant to s 855-10(1) of Subdivision 855-A of the ITAA 1997.

3. This turns on whether AP Energy's membership interest in Abra, as at 3 December 2007, passed the "principal asset test" ( PAT ) in s 855-30 of the ITAA 1997 and, in particular, the "market value" of Abra's "mining information", and the resulting residual amount for Abra's mining rights and the intangible value created by Abra holding both mining information and mining rights.

4. More specifically, AP Energy seeks a review of the Commissioner's objection decision (dated 11 May 2010) which allowed (in part) AP Energy's objection (dated 7 October 2008) to its income tax assessment for the year ended 30 June 2008 (issued on 12 September 2008) which included a capital gain (of AUD $6,017,467) on the part disposal by AP Energy of its shares in Abra on 3 December 2007.

EVIDENCE

AP Energy's evidence

5. AP Energy's evidence before the Tribunal comprised:

  • • a file (containing 26 documents) titled "Documents Supplied by MKT Taxation Advisors" filed with the Tribunal on 11 February 2011 and tendered as "Exhibit A1" ( AP Energy Documents );
  • • Mr Longworth's working papers provided under a red tab, titled "Supporting data" (in a folder provided by AP Energy) and a USB stick containing the same "Supporting data", tendered together as "Exhibit A2" ( Mr Longworth's Supporting Data );
  • • the "MKT Valuation Expert Witness Report" prepared by Xstract Mining Consultants Pty Ltd ( Xstract ) for MXT Taxation Advisors, dated 25 July 2012, tendered as "Exhibit A3" ( MKT Valuation Report ). The Appendices to Mr Longworth's Valuation Report comprise:
    • (i) Appendix A: List of annual reports from DMP [Department of Mines and Petroleum of Western Australia];
    • (ii) Appendix B: List of [Abra's] tenements [as at 3 December 2007];
    • (iii) Appendix C: comprises:
      • • the "Witness Statement of Mathew Longworth", dated 25 July 2012 ( Mr Longworth's July 2012 Witness Statement );
      • • the "Curriculum Vitae Mathew Longworth" (undated) ( Mr Longworth's CV ); and
      • • a Letter of Engagement from MKT Taxation Advisors to M Jeames McKibben of Xstract, dated 16 April 2012 ( MKT Brief );
  • • The "Witness Statement of Mathew Longworth", dated 12 September 2012,

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    tendered as "Exhibit A4" ( Mr Longworth's September 2012 Witness Statement );
  • • an extract from the text "The Valuation of Mining Assets" by Mr Wayne Lonergan, Sydney University Press, 2006, at p 134, tendered as "Exhibit A6"; and
  • • an article by the Inspector-General of Taxation, titled "New IGT Work Program" and dated 10 October 2012 (from www.igt.gov.au) and a Press Release from the Inspector-General of Taxation, titled "New IGT Work Program Announced" and dated 10 October 2012, together tendered as "Exhibit A7"; and
  • • the oral evidence of Mr Longworth.

Commissioner's evidence

6. The Commissioner's evidence before the Tribunal comprised:

  • • an "Independent Valuation Abra Mining Limited" prepared by Xstract Mining Consultants Pty Ltd for BDO Corporate Finance Pty Ltd, dated 4 May 2011, tendered as "Exhibit R1" ( BDO Valuation ). The Appendices to the BDO Valuation comprise:
    • (i) Appendix A: Resource transactions; and
    • (ii) Appendix B: Exploration transactions.
  • • a "Sub-section 37 (AAB) Statement in Lieu - Reasons for Decision and Relevant Documents, filed on 4 April 2012 and tendered as "Exhibit R2" ( T1 - T35 );
  • • "Supplementary Section 37 Documents", filed on 5 April 2012 and tendered as "Exhibit R3" ( S1 - S8 ); and
  • • the "Witness Statement of Shaun Lonergan", dated and received on 18 December 2012 and tendered as "Exhibit R4" ( Mr Lonergan's December 2012 Witness Statement ). Annexed to Mr Lonergan's December 2012 Witness Statement are:
    • (i) SL-1: "Expert Report AP Energy Investments Limited & Commissioner of Taxation AAT Taxation Appeals Division WT2010/2845", by Mr Lonergan, dated 18 December 2012 ( Mr Lonergan's December 2012 Expert Report );
    • (ii) SL-2: a letter of instructions from the AGS to Mr Lonergan concerning the provision of Mr Lonergan's December 2012 Expert Report, dated 3 December 2012; and
    • (iii) SL-3: the curriculum vitae of Mr Lonergan (undated);
  • • A copy of the Administrative Appeals Tribunal's ( AAT ) "Guidelines for Persons Giving Expert and Opinion Evidence" by the Honourable Justice Garry Downes AM, former President of the AAT, dated 9 November 2011 ( AAT Guidelines on Expert and Opinion Evidence ); and
  • • the oral evidence of Mr Lonergan.

'Admissibility' of MFI 5

7. On 12 February 2013 (being the second day of the hearing of this application, the matter having been adjourned from 3 October 2012), the Commissioner objected to the tender of the "Witness Statement of Mathew Longworth", dated 29 January 2013 ( Mr Longworth's January 2013 Witness Statement ). Annexed to Mr Longworth's January 2013 Witness Statement are:

  • (i) Mr Longworth's comments on Mr Lonergan's December 2012 Expert Report (which, as stated above, is annexed to Mr Lonergan's December 2012 Witness Statement);
  • (ii) copies of ss 48, 66 and 85 of the Mining Act 1978 (WA) ( Mining Act );
  • (iii) a "Mining Tenement Summary Report" of M 52/776 Mining Lease from the Western Australian Department of Mines and Petroleum, highlighting omitted exploration expenditure of Abra;
  • (iv) an "Original Spreadsheet", valuation date 3 December 2007, identifying omitted exploration expenditure of Abra;
  • (v) a "Corrected Spreadsheet", valuation date 3 December 2007, incorporating the previously omitted exploration expenditure of Abra; and
  • (vi) a copy of "The VALMIN Code 2005 Edition - Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for

    ATC 5893

    Independent Expert Reports", published by the Australasian Institute of Mining & Metallurgy (AusIMM) ( VALMIN Code ).

8. In response to the Commissioner's objection, the Tribunal marked Mr Longworth's January 2013 Witness Statement as "MFI 5" and said that it would consider the tender of MFI 5 (as "Exhibit A5") in its Reasons for Decision.

9. In summary, the Commissioner objected to the tender of Mr Longworth's January 2013 Witness Statement (MFI 5) for the following reasons:

  • • that it does not comply with, among other things, paragraphs 10 and 11 of the AAT Guidelines on Expert and Opinion Evidence;
  • • that it seeks to give evidence as to the legal effect of certain sections of the Mining Act which is inadmissible from Mr Longworth since Mr Longworth is a geologist and cannot provide opinion evidence about legislation; and
  • • that it is inadmissible as a question of law and for the Tribunal to admit it would be an error of law: Transcript at pp 10-12.

10. Paragraphs 10 and 11 of the AAT Guidelines on Expert and Opinion Evidence state:

  • 11. A written report prepared for the purpose of proceedings in the AAT must include the following information either in the body of the report or as an annexure:
    • a. details of the person's area of knowledge and his or her qualifications and/or experience;
    • b. the letter of instruction or details of the questions or issues the person was asked to address in the report as well as a reference to any documents or other materials the persons was given to consider;
    • c. details of any facts and assumptions that inform the report and the sources for the factual information in the report;
    • d. reasons for any opinion that is expressed.

11. Where relevant, the written report must also include the following information either in the body of the report or as an annexure:

  • a. details of any examinations, test or other investigations upon which the person has relied in preparing the report as well as the identity, qualifications and experience of the person who conducted any examinations, tests or investigations;
  • b. details of any literature or other material relied on particularly in preparing the report.

12. The Commissioner's objection to the tender of MFI 5 was not on the grounds of "relevance": Transcript at p 15 [25] - [30].

13. In tendering MFI 5 as "Exhibit A5", the Tribunal makes the following comments.

14. Proceedings in the Tribunal "shall be conducted with as little formality and technicality" as required at law and as "a proper consideration of the matters before the Tribunal permit" and the Tribunal:

"is not bound by the rules of evidence but may inform itself on any matter in such manner as it thinks appropriate ": s 33(1)(b) and (c) of the Administrative Appeals Tribunal Act 1975 (Cth) ( AAT Act ). [Emphasis added]

15. In
Minister for Immigration and Multicultural Affairs v Eshetu (1999) 197 CLR 611 at 628;
54 ALD 289 at 301, the High Court of Australia said that provisions like s 33 of the AAT Act:

….are intended to be facultative, not restrictive. Their purpose is to free tribunals, at least to some degree, from constraints otherwise applicable to courts of law, and regarded as inappropriate to tribunals . [Emphasis added]

16. The Tribunal's basic obligation is to reach the decision that it objectively considers to be the correct and preferable decision:
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at 78 per Smithers J. In doing so, evidence which may not be admitted in a court can be taken into account by the Tribunal. That is, statutory limitations on the evidence admissible in a court, do not apply in the Tribunal:
Re Pouki and Australian Telecommunications Commission (1984) 6 ALD 324.

17. The Tribunal agrees with the following extract from the "Applicant's Written Submissions" (dated 22 February 2013) ( AP


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Energy's Written Submissions
) at pp 23-24 [58]:

….the terms "admissible" and "inadmissible" are outside the Tribunal's lexicon. The test as to whether or not the Tribunal should have regard to all or any part of the material in Mr Longworth's [January 2013 Witness Statement] is whether it is relevant and logically probative in assisting the Tribunal to reach the correct and preferable decision standing in the shoes of the [Commissioner]….the Guidelines do not give parties warning that evidence will be rendered "inadmissible". To the contrary, the Guidelines state that the tribunal can have regard to material that would be inadmissible in a court applying the rules of evidence and refer to the Tribunal determining the weight that should be given to the evidence before it: see paragraphs 1, 2, 3 and 6 of the Guidelines.

18. The test has been said to be whether the evidence is "logically probative" and relevant to the issues before the Tribunal:
Re Pochi and Minister for Immigration and Ethnic Affairs (1979) 2 ALD 33. Similarly, in
Casey v Repatriation Commission (1995) 60 FCR 510; 39 ALD 34 at 514 [38] Hill J stated:

….s 33 of the AAT Act means what it says. The fact that material may be inadmissible in accordance with the law of evidence does not mean that it cannot be admitted into evidence by the tribunal and taken into account by it. The criterion for the admissibility of material in the tribunal is not to be found within the interstices of the rules of evidence but within the limits of relevance.

See also
Secretary, Department of Social Security v Jordan (1998) 83 FCR 34; 49 ALD 496 at 504, where Hill J repeated the above statement.

19. With respect to counsel for the Commissioner, it is false to suggest that the tender of Mr Longworth's January 2013 Witness Statement by the Tribunal would constitute an error of law, because of its alleged non-compliance with the AAT Guidelines on Expert and Opinion Evidence. Those guidelines, as their name suggests, are merely "guidelines" which, as stated (at [3]), are:

3. ……are designed to inform parties, their representatives and persons giving evidence about the AAT's expectations in relation to [expert and opinion] evidence.

20. That is, non-compliance with the AAT Guidelines on Expert and Opinion will not, by itself, render evidence "inadmissible".

21. Much of Mr Longworth's January 2013 Witness Statement does not, in the Tribunal's opinion, purport to be a "written report" within the meaning of the AAT Guidelines on Expert and Opinion Evidence and, in particular, paragraphs 10 and 11 of those guidelines. Rather, much of Mr Longworth's January 2013 Witness Statement is, as its name suggests, a "witness statement" which seeks to respond to the criticisms made by Mr Lonergan, in Mr Lonergan's December 2012 Expert Report (annexed to Mr Lonergan's December 2012 Witness Statement), of the valuation methodology adopted by Mr Longworth in the MKT Valuation Report. As discussed below (in paragraph 146), such a response was expected and encouraged by the Commissioner.

22. In the reasons which follow, the Tribunal has referred only to those parts of Mr Longworth's January 2013 Witness Statement (Exhibit A5) which it considers "logically probative" and relevant to the issues before the Tribunal.

23. Finally, the Tribunal refers to the "Ceremonial Sitting of the Tribunal for the Swearing in and Welcome of the Honourable Justice Kerr as President", held on 16 May 2012, where the Honourable Justice D Kerr, Chev LH, President of the Tribunal, quoting his application to be appointed President of the Tribunal, stated:

I favour working within the AAT to ensure that any unnecessary rigidities and adversarial processes that may have crept into the way the Tribunal operates are reduced or removed. I am conscious that there are many areas of the work of the AAT where processes akin to a court may be appropriate but in the end the work of the AAT is designed to produce through fair processes the best and preferable decision that a sound administrator ought to have arrives at with the least delay in cost. It is


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not to replicate the processes and work of the courts
. [Emphasis added]

See Auscript Australasia Pty Limited, Transcript of Proceeding (O/N H-59979) at p 15.

BACKGROUND

24. AP Energy is a Chinese registered investment company based in Beijing in the People's Republic of China: AP Energy Documents at pp 3 and 7.

25. On 7 December 2006 AP Energy entered into a "Share Subscription and Option Issue Agreement" with Abra, an Australian incorporated company which is listed on the Australian Stock Exchange ( AP Energy/Abra Agreement ): AP Energy Documents at pp 5 - 14.

26. Pursuant to the AP Energy/Abra Agreement, AP Energy:

  • (i) subscribed for 9 million fully paid Ordinary Shares in Abra (at a cost of $0.25 per share) which shares were duly issued on 11 December 2006; and
  • (ii) was granted 9 million options to acquire Abra shares (with an exercise price of $0.27 per share, exercisable on or before 8 June 2007) and a further 11 million options to acquire Abra shares (with an exercise price of $0.30 per share, exercisable on or before 8 September 2007): AP Energy Documents at p 7 and pp 9-10.

27. On 8 June 2007 AP Energy exercised its 9 million options (at an exercise price of $0.27 per share), which resulted in AP Energy's shareholding in Abra increasing to 21.4%: AP Energy Documents at pp 26-27.

28. On 3 December 2007 AP Energy and entered into a "Share Acquisition Agreement" with Hunan Nonferrous Metals Holding Group Co., Ltd ( Hunan ) pursuant to which AP Energy disposed of 15,046,420 of its 18,000,000 Abra shares to Hunan for a total consideration of Chinese Yuan CNY 65 million ( AP Energy/Hunan Agreement ): AP Energy Documents at pp 48-65.

29. On 12 September 2008, the Commissioner issued AP Energy with an assessment for the year ended 30 June 2008 for the amount of $1,805,240, ( Assessmen t): T12 at pp 41-42. The Assessment included a capital gain of AUD $6,017,467 in respect of AP Energy's part disposal of its Abra shares to Hunan on 3 December 2007: T12 at p 41.

30. On 6 October 2008, AP Energy objected to the Assessment ( Objection ): T14 at pp 45-55. The Objection concludes (at T14 at p 48):

2.5 Conclusion

As the principal asset test is not satisfied, the shares in Abra are not an indirect Australian real property interest.

It follows that the shares are not taxable Australian property and accordingly the capital gain made on sale may be disregarded pursuant to section 855-10 of the 1997 Tax Act.

31. On 11 May 2010, the Commissioner allowed the Objection in part, by reducing AP Energy's taxable income from capital gains from $6,017,467 to $4,689,270 (Objection Decision): T 35 at pp 231-232.

32. In his "Reasons for Decision", attached to the Objection Decision, the Commissioner refers in support of his reasons to a "Limited Scope Valuation of Abra", prepared by Mr Shaun Lonergan of the Australian Valuation Office ( AVO ), dated 2 October 2009 (and as amended at the hearing on 12 February 2013) ( AVO Valuation ) (at T2 at pp 12-13) as follows:

Valuation

……….

The AVO report noted that it would be their preference to complete a market valuation on each of the assets held by Abra, but states that as Abra is an exploration and development company, a majority of the value of the firm lies within its intangible assets classes. With a large proportion of this value within mining rights and information, such expense is not seen to be necessary in order to determine whether the PAT is passed with a reasonable level of confidence. They also noted that a valuation of Abra's early stage exploration assets would be highly subjective.

For these reasons the AVO used a residual method to value mining rights. Values were ascribed to Abra's tangible assets


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and this amount was subtracted from the value of the total assets (using market capitalisation as a starting point) in order to estimate the value of intangible assets. By estimating the maximum possible market value of mining information (assumed for the purposes of the valuation to be non TARP), the AVO considered that the residual amount represented the value of the mining rights.

The Tax Office is of the opinion that the residual methodology used by the AVO only errs in the favour of the taxpayer, i.e. it over-values mining information whilst undervaluing mining rights. It is therefore only appropriate to rely on this methodology as a way of showing that the value of the assets that are TARP exceeds the value of assets that are not TARP.

Further, the Tax Office is of the view that generally the residual methodology does not result in a valuation that satisfies the legislative requirements of Division 855. It would not be appropriate therefore to rely on this methodology to show that the total value of assets that are not TARP exceeded the value of assets that are TARP as a basis for establishing that Division 855 will apply to allow and entity to disregard a capital gain. Additional valuations/investigations are required before it can be concluded that Division 855 will apply to disregard a capital gain.

The basis on which the Tax Office adopts this approach [i.e. the residual methodology] in this case is in the interests of practical administration of the law. We are of the opinion that to undertake further investigation would only increase the costs of administration and would ultimately lead to the same outcome for AP Energy. [Emphasis added]

33. In his "Reasons for Decision", attached to the Objection Decision, the Commissioner concludes (at T2 at p13):

The objection has failed to establish that the sum of the market value of Abra's TARP do not exceed the sum of the market values of the assets that are not TARP at the relevant dates.

AP Energy's interest in Abra at the relevant times were, "indirect Australian real property interests', because the interests passed the 'non-portfolio interest test' as set out in subparagraph 855-25(1)(a)(ii) of the ITAA 1997 as well as the principal asset test in section 855-30 of the ITAA 1997. As such, the taxpayer's interests in Abra were 'taxable Australian property' at the time of the disposals on 3 December 2007 and 11 September 2008.

Hence Division 855 does not operate to allow AP Energy to disregard the capital gains in either the 2007-08 or 2008-9 income years.

34. On 9 July 2010 AP Energy applied to the Tribunal for a review of the Objection Decision: T1 at pp 1-2.

ISSUES

35. In dispute is the application of the "principal asset test" in s 855-30 of the ITAA 1997 ( PAT ) and, in particular, whether AP Energy passed the PAT on 3 December 2007.

36. Broadly, AP Energy's membership interest in Abra (as at 3 December 2007) will pass the "principal asset test" if the sum of the "market value" of Abra's assets that are "taxable Australian real property" ( TARP ) exceeds the sum of the "market value" of its assets that are not "taxable Australian real property" ( non-TARP ). In other words, AP Energy's membership interest in Abra will pass the "principal asset test" if more than 50% of the "market value" of Abra's assets (as at 3 December 2007) is attributable to TARP, which is defined in s 855-20 of the ITAA 1997 to include mining rights.

37. As discussed in detail below, the material difference between AP Energy's and the Commissioner's value split of Abra's assets as at 3 December 2007 is the "market value" of Abra's "mining information", and the resulting residual amount for Abra's mining rights and the intangible value created by Abra holding both mining information and mining rights.

38. The following matters are not contentious:


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    • AP Energy is not a "resident of Australia" for Australian tax purposes;
  • • AP Energy's part disposal of its shares in Abra on 3 December 2007 is a "CGT event A1" under s 104-10 of the ITAA 1997;
  • • the conversion of AP Energy's capital gain on the part disposal of its shares in Abra on 3 December 2007 from Chinese Yuan (CNY) to Australian Dollars (AUD) pursuant to the functional currency rules in Subdivision 960-D of the ITAA 1997: see, in particular, s 960-61 of the ITAA 1997; and
  • • AP Energy's membership interest in Abra as at 3 December 2007 passed the non-portfolio interest test in s 960-195 of the ITAA 1997 (as referred to in s 855-25 of the ITAA 1997), since AP Energy held more than 10% of the issued capital of Abra on that date.

BURDEN OF PROOF

39. Pursuant to s 14ZZK(b)(i) of the ITAA, AP Energy bears the burden of proving that the Assessment is excessive as well as what the correct assessment ought to be:
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 164 and
ANZ Savings Bank Ltd v Federal Commissioner of Taxation 94 ATC 4844. The standard of proof is on the balance of probabilities:
Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139 and
Re Kirby and Collector of Customs (1989) 20 ALD 369.

40. The burden is not necessarily discharged, for example, by showing an error by the Commissioner in forming a judgement as to the amount of the Assessment:
Dalco (1990) 168 CLR 614 at 621 and
Vadesz v Commissioner of Taxation [2006] AATA 682 at [31].

41. In
Gauci & Ors v Federal Commissioner of Taxation (1975) 135 CLR 81, Mason J held (at 89) that there is no onus on the Commissioner to show that the Assessment is reasonable or supported by evidence as follows:

The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implications of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.

42. If AP Energy is unable to establish that the Assessment is excessive, then the Assessment must stand, irrespective of whether there are any facts or circumstances which would, on the face of it, support it:
Gauci (1975) 135 CLR 81 at 89 per Mason J;
McCormack v Federal Commissioner of Taxation 79 ATC 4111; 80 ATC 4179 and
Macmine Pty Ltd v Federal Commissioner of Taxation 79 ATC 4133.

RELEVANT LAW

43. Generally, foreign residents are subject to Australian tax on income with an Australian source and are exempt from Australian tax on income with a foreign source: ss 6-5(3) and 6-10(5) of the ITAA 1997. However, there are some qualifications to this rule, including the special regime in Subdivision 855-A of Division 855 of the ITAA 1997, which broadly provides that foreign residents are subject to CGT only where a CGT event (that happens on or after 12 December 2006) happens in relation to certain CGT assets, collectively referred to as "taxable Australian property".

44. The stated objects of Subdivision 855-A of the ITAA 1997 are to improve Australia's status as an attractive place for business and investment and the integrity of Australia's CGT base: s 855-5 of the ITAA 1997.

45. Section 855-10 of the ITAA 1997 (which section has effect in relation to CGT events happening on or after 12 December 2006) provides that a person who is a foreign resident, just before the CGT event happens, may disregard a capital gain or a capital loss from a CGT event if the event happens in relation to a CGT asset that is not "taxable Australian property". Section 855-10(1) of the ITAA 1997 relevantly provides:

Disregarding a capital gain or loss from CGT events

855-10(1) Disregard a *capital gain or *capital loss from a *CGT event if:


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    (a) you are a foreign resident, or the trustee of a *foreign trust for CGT purposes, just before the CGT event happens; and
  • (b) the CGT event happens in relation to a *CGT asset that is not *taxable Australian property.

46. As discussed above, it is common ground that AP Energy was a foreign resident just before the part disposal of its shares in Abra on 3 December 2007 and that this share disposal constituted a "CGT event A1" for Australian tax purposes.

47. The expression "taxable Australian property" is defined in s 855-15 of the ITAA 1997. That section states that there are 5 categories of CGT assets that are "taxable Australian property". Relevant to this application are the categories "taxable Australian real property" (in Item 1 of the Table in s 855-15 of the ITAA 1997) and a CGT asset that is an "indirect Australian real property interest" (in Item 2(a) of the Table in s 855-15 of the ITAA 1997).

48. "Taxable Australian real property" is defined in s 855-20 of the ITAA 1997 as follows:

Taxable Australian real property

855-20 A *CGT asset is taxable Australian real property if it is:

  • (a) real property situated in Australia (including a lease of land, if the land is situated in Australia); or
  • (b) a *mining, quarrying or prospecting right (to the extent that the right is not real property), if the *minerals, *petroleum or quarry materials are situated in Australia. [Emphasis added]

49. "Real property" is not defined in the ITAA 1997 (or the Income Tax Assessment Act 1936 (Cth)) and takes its ordinary meaning, rather than its technical legal meaning. Broadly, "real property" refers to interests in or over land, including fixtures attached to the land (such as buildings and plant) and a lease of land.

50. The expression "mining, quarrying or prospecting right" is defined in the "Dictionary" to the ITAA 1997 (in s 995-1(1) of the ITAA 1997) as follows:

"mining, quarrying or prospecting right" is:

  • (a) an authority, licence, permit or right under an * Australian law to mine, quarry or prospect for * minerals, * petroleum or quarry materials; or
  • (b) a lease of land that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land; or
  • (c) an interest in such an authority, licence, permit, right or lease; or
  • (d) any rights that:
    • (i) are in respect of buildings or other improvements (including anything covered by the definition of housing and welfare) that are on the land concerned or are used in connection with operations on it; and
    • (ii) are acquired with such an authority, licence, permit, right, lease or interest.

However, a right in respect of anything covered by the definition of housing and welfare in relation to a quarrying site is not a mining, quarrying or prospecting right.

51. As discussed, the second category of "taxable Australian real property" is "indirect Australian real property interests": see Item 2(a) of the Table in s 855-15 of the ITAA 1997.

52. Section 855-25(1) of the ITAA 1997 defines "indirect Australian real property interests" as follows:

Indirect Australian real property interests

855-25(1) A *membership interest held by an entity (the holding entity ) in another entity (the test entity ) at a time is an indirect Australian real property interest at that time if:

  • (a) the interest passes the *non-portfolio interest test (see section 960-195) :
    • (i) at that time; or
    • (ii) throughout a 12 month period that began no earlier than 24 months before that time and ended no later than that time; and
  • (b) the interest passes the principal asset test in section 855-30 at that time. [Emphasis added]

53.


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Thus, s 855-25(1) of the ITAA 1997 requires that to be an "indirect Australian real property interest" for the purposes of s 855-25(1) of the ITAA 1997 the relevant membership interest pass both the "non-portfolio interest test" (in s 960-165 of the ITAA 1997) and the "principal asset test" (in s 855-30 of the ITAA 1997) at the relevant time.

54. The "non-portfolio interest test" (referred to in s 855-25(1)(a) of the ITAA 1997) is defined in s 960-195 of the ITAA 1997 as follows:

An interest held by an entity (the holding entity) in another entity (the test entity) passes the non-portfolio interest test at a time if the sum of the direct participation interests held by the holding entity and its associates in the test entity at that time is 10% or more.

55. As discussed above, it is not in dispute that just before the disposal of its shares in Abra to Hunan on 3 December 2007, AP Energy passed the "non-portfolio interest test" (as defined in s 960-195 of the ITAA 1997) for the purposes of s 855-25(1)(a) of the ITAA 1997, since its held more than 10% of the issued capital in Abra at that time (it in fact held 21.04% of Abra's issued capital as at 3 December 2007).

Principal asset test

56. Section 855-30(1) of the ITAA 1997 states that he purpose of the PAT is:

to define when an entity's underlying value is principally derived from Australian real property.

57. Section 855-30(2) to (5) of the ITAA 1997 outline the PAT as follows:

  • 855-30(2) A *membership interest held by an entity (the holding entity ) in another entity (the test entity) passes the principal asset test if the sum of the *market values of the test entity's assets that are *taxable Australian real property exceeds the sum of the *market values of its assets that are not taxable Australian real property.
  • 855-30(3) For the purposes of subsection (2), treat an asset of an entity (the first entity) that is a * membership interest in another entity (the other entity) as if it were instead the following 2 assets:
    • (a) an asset that is * taxable Australian real property (the TARP asset );
    • (b) an asset that is not taxable Australian real property (the non-TARP asset ).
  • 855-30(4) For the purposes of subsection (2), treat the * market value of the TARP asset and the non-TARP asset according to the following table.


    Market value of the TARP asset and the non-TARP asset
    Item If: the market value of the TARP asset is: the market value of the non-TARP asset is:
    1 (a) the first entity 's * direct participation interest in the other entity is less than 10%; or zero the * market value of the * membership interest mentioned in subsection (3)
      (b) the holding entity 's * total participation interest in the other entity is less than 10%    

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    2 item 1 does not apply the product of: the product of:
        (a) the sum of the * market values of all the assets of the other entity that are * taxable Australian real property ; and (a) the sum of the market values of all the assets of the other entity that are not taxable Australian real property ; and
        (b) the first entity 's * direct participation interest in the other entity (b) the first entity 's direct participation interest in the other entity

    Note:

    For the purposes of item 2 of the table, it is necessary to work out the market value of any TARP assets and non-TARP assets in relation to any membership interests held by the other entity before working out the value of the TARP asset and non-TARP asset held by the first entity.

  • 855-30(5) For the purposes of this section, disregard the * market value of any asset acquired by the test entity, or by any other entity, if the * acquisition was done for a purpose (other than an incidental purpose) that included ensuring that a * membership interest in any entity would not pass the principal asset test in this section.

58. "Market value" is defined in the "Dictionary" to the ITAA 1997 (in s 995-1(1) of the ITAA 1997) as follows:

market value has the meaning affected by Subdivision 960-S.

59. Subdivision 960-S of the ITAA 1997, titled "Market value", contains a boxed "Theme statement" (in s 960-400 of the ITAA 1997) which states:

The expression "market value" is often used in this Act with its ordinary meaning.

However, in some cases that expression has a meaning affected by this Subdivision.

60. The terms of Subdivision 960-S do not affect the application in this case of the ordinary meaning of "market value".

61. The ordinary meaning of "market value" of land was considered by the High Court in the seminal case
Spencer v The Commonwealth (1907) 5 CLR 418. In that case, Griffith CJ commented (at 432) that:

……the test of value of land is to be determined, not by inquiring what price a man desiring to sell could have obtained for it on a given day, i.e. whether there was, in fact, on that day a willing buyer, but by inquiring: What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell? [Emphasis added]

62. Isaacs J subsequently expanded on the concept (at 440-441) as follows:

In the first place the ultimate question is, what was the value of the land on 1st January 1905?

……….The facts existing on 1 January 1905 are the only relevant facts, and the all important fact on that day is the opinion regarding the fair price of the land, which a hypothetical prudent purchaser would entertain, if he desired to purchase it for the most advantageous purpose for which it was adapted To arrive at the value of the land at that date, we have….to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between [a vendor] and a purchaser willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land and cognisant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present


ATC 5901

demand for the land, and the likelihood as then appearing to persons best capable of forming an opinion, of a rise or fall for what reasons so ever in the amount which one would otherwise be willing to fix as to the value of the property. [Emphasis added]

63. Thus, in Spencer, in considering the meaning of "market value" the High Court recognised the principles of the willing but not anxious vendor and purchaser, a hypothetical market, the vendor and purchaser being fully informed of the advantages and disadvantages with the asset being valued (in that case, land) and the vendor and purchaser being aware of current market conditions.

64. In
Boland v Yates Property Corporation Pty Ltd (2007) 167 ALR 675 at [271]-[274], Callinan J, described the "fair price of the land" test referred to by Isaacs J in Spencer (at (107)
5 CLR 418 at 400-441) as the "highest and best use" of the asset to be valued. The concept of "highest and best use" takes into account any potential for a use that is higher than the current use (as the current use of an asset may not reflect its optimal value).

65. The test in Spencer was later adopted by the High Court in
Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23 at 29, where Williams J described "market value" as:

…the price which a willing but not anxious vendor could reasonably expect to have to pay….if the vendor and purchaser had got together and agreed on a price in friendly negotiation.

66. The Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 4) Bill 2006 (Cth) ( EM ), which Bill resulted in the Act which inserted Division 855 into the ITAA 1997, explains how assets are to be valued for the purposes of the PAT in s 855-30 of the ITAA 1997. The EM essentially adopts the ordinary meaning of "market value" (as discussed above) but makes some additional points concerning "market value", as follows:

How should assets be valued?

  • 4.79 Assets should be measured at fair market value. The 'market value' is the amount that a willing purchaser, acting at arm's length to the seller, would pay for the asset .
  • 4.81 It would be expected that an entity would do all it can to arrive at market valuation. If an entity is not required to prepare financial statements or it has not prepared financial statements then a market valuation would be required.
  • 4.82 When a taxpayer cannot get access to information, or the taxpayer does not have sufficient control to demand that a market valuation be undertaken, the taxpayer may use the value in the audited accounts of the entity only when the asset value is determined under the revaluation method ( ie, the fair value of the asset ). These accounts would be expected to be prepared in accordance with the Australian equivalents to the International Accounting Standards. Asset values determined under the cost method do not represent an accurate value for the real property and may result in distortions in the calculation of whether the principal asset test is met.
  • 4.83 Where an entity, the subject of the principal asset test, has no assets that are membership interests to look through, it may not be necessary to value each of its assets. Rather, the market value of the total assets as a whole may be ascertained by reference to the market price of the shares in an entity. In the simple case where the total market value of all the shares in a company is $300, and the company has $100 of liabilities, the market value of the total assets of the entity will then be $300 (market value of the entity) plus $100 (liabilities). If the market value of taxable Australian real property assets of the entity is $50, then the value of non-taxable Australian real property assets of the entity would be the balance of $350. [Emphasis added]

Resource Capital Fund III LP

67. At the time this application was heard, there was no judicial authority or Tribunal decision on the interpretation and application of Division 855 of the ITAA 1997 and, in particular, the "principal asset test" in s 855-30 of the ITAA 1997.

68. However, on 23 April 2013, the Federal Court, constituted by Edmonds J, delivered


ATC 5902

judgment in
Resource Capital III LP v Commissioner of Taxation [2013] FCA 363; (2013) ATC 20-386 ( RCF ), which case considered the application of Division 855 of the ITAA 1997.

69. It is understood from the "Respondent's Supplementary Submissions", dated 30 May 2013, that on 17 May 2013 a notice of appeal was filed by the Commissioner in the Federal Court of Australia, NSW Registry, appealing Edmonds J's decision in RCF and those parts of RCF which concern the application of the "principal asset test" in s 855-30(2) of Division 855 of the ITAA 1997 are included in the Commissioner's grounds of appeal.

70. In RCF, the application of the PAT was not decisive: see [76]-[79]. Instead, the primary matter which determined the outcome in RCF (i.e. the ratio decidendi) was the application of the United States/Australia Double Taxation Convention ( US DTA ). Specifically, the question for the Court in RCF was who was the relevant entity for assessing the capital gain made by Resource Capital III LP ( RCF ) on the sale of its shares in St Barbara Mines Ltd (now called St Barbara Limited) ( SBM ) - was it the limited partners of RCF, who were resident in the US (as contended by the taxpayer), or was it RCF?: see [1] and [28].

71. Having found that, under the US DTA and in accordance with s 4 of the International Agreements Act 1953 (Cth), the relevant entity for assessment of the capital gain was the limited partners of RCF, Edmonds J found that the assessment issued to RCF in respect of the capital gain on the disposal of its shares in SBM was precluded by the US DTA: see [76] - [78].

72. At [79], Edmonds J states:

SECOND ISSUE: THE TARP ISSUE

My conclusion on the treaty issue is sufficient to allow the appeal; set aside the Commissioner's deemed disallowance of RCF's objection against the Assessment; and allow RCF's objections against the Assessment and the Penalty Assessment in full. Nevertheless, out of deference to the efforts of the parties involved in preparing the TARP issue for hearing; to the proportion of the hearing time devoted to the TARP issue both in terms of evidence adduced and tested; as well as the respective submissions made in reliance on that evidence, it was agreed that even if I was to conclude as I have on the treaty issue, I should nevertheless address and determine the TARP issue. An appeal court will then have the benefit of my reasons and conclusions on both issues.

73. It follows that Edmonds J's comments in RCF concerning the application of Division 855 of the ITAA 1997 (and the "TARP issue", as his Honour describes it) are obiter dicta and are not binding on the Tribunal. It is, of course, open to the Tribunal to be guided by obiter remarks in a Federal Court decision in appropriate circumstances.

74. Importantly, at [95] to [96] Edmonds J makes the following observations concerning the PAT in s 855-30 of the ITAA 1997:

  • 95. Sub-section (1) speaks of the purpose of the section as being to define when an entity's underlying value is principally derived from Australia real property. What the section is concerned to measure is not the value (singular) of SBM or all the assets of its business as a going concern, but the values (plural) of its underlying assets (whether or not used in the business) and to define when the sum of the values of its underlying assets (what it calls the "entity's underlying value") is principally derived from Australian real property. Sub-section (2) provides the criterion for passing the "principal asset test": when the sum of the market values of the entity's assets that are TARP exceeds the sum of the market values of its assets that are non-TARP.
  • 96. It is clear from the text of s 855-30(2) that the "principal asset test" requires separate determination of the market value of each of the entity's assets; not the determination of the market value of all its TARP assets as a class and the determination of the market value of all its non-TARP assets as a class (although where an entity has only two or three assets in a particular class, such a determination may be tempting as a surrogate short-cut); and certainly not the determination of the market value of all its assets on a going concern basis. The test further requires that the classification of these assets into TARP or

    ATC 5903

    non-TARP. Finally it requires the summing of the values in each class to determine whether the sum of the market values of the entity's TARP assets exceed the sum of the market values of the entity's non-TARP assets; only if it does; is the "principal asset test" passed.

75. At [101] to [102], Edmonds J accepted RCF's formulation that an "asset is to be valued by reference to the hypothetical price that would be agreed between the parties on a stand-alone basis as if no other asset were offered for sale" as the correct starting point.

76. However, according to his Honour (at [102]):

…….the formulation needs to go further and incorporate the further assumption that, in the case of hypothetical transactions involving mining information or plant or equipment, the hypothetical purchaser is the owner of the mining rights and, as such, is able to use the relevant asset, mining information or plant and equipment, in a manner consistent with the most advantageous purpose for which it is adopted or, its "highest and best use". All the Experts agreed that this was in a business of mining the reserves in SBM's mining tenements.

77. At [103] and [153], the Court rejected as wrong and as finding no support in the statute, the Commissioner's contention that s 855-30(2) requires the entity be valued on a combined asset market value (i.e. is concerned with the determination of all of SBM's assets as a "going concern") and then the value be allocated into the categories of TARP and non-TARP asset values. Edmonds J said (at [103]) that s 855-30(2) "is concerned with the determination of the individual market values of SBM's assets, at least before the summing and comparison of the dual classification of those assets".

78. The Court stated (at [105], [106] and [108]) that:

  • 105. Adoption of such hypotheses would require different methodologies in relation to different assets. In the case of the mining rights, their hypothetical price, as the determinant of their individual market value, would be the value which could be extracted from the tenements by mining them, as ascertained by reference to discounted cashflows, less the cost (time delay cost as well as outlay) of re-creating the mining information and replacing the plant and equipment assumed not to be owned by the owner of the mining rights and not otherwise available for purchase. Such a methodology is consistent with that adopted by the Supreme Court of Western Australia in
    Nischu Pty Ltd v Commissioner of State Taxation (WA) (1990) 21 ATR 329 and by the Full Court of that Court on appeal:
    Commissioner of State Taxation (WA) v Nischu Pty Ltd (1991) 4 WAR 437 in relation to the valuation of the land of Murchison Zinc Company Pty Ltd ("Murchison"); recognising that "in agreeing upon a price for the land, the hypothetical vendor and purchaser would have regard to the cost of regenerating or acquiring the important information that would not otherwise be available to the purchaser after the sale" (at 396). A fortiori in the case of the plant. The Full Court unanimously dismissed the Commissioner's appeal from this decision and held that the mining tenements were correctly valued on the basis that "the hypothetical vendor and purchaser would have regard to the cost of regenerating or acquiring the important information that would not otherwise be available to the purchaser after the sale. This cost would cause the parties to reduce the price that would otherwise be appropriate for Murchison's land" (at 445 per Malcolm CJ; at 456 per Wallace and Pidgeon JJ each concurring), and that the cost had properly been assessed by taking into account "the cost of replacing the information, costs or losses resulting from consequential delay in development … and the risk of unforeseen costs" using a discounted cash flow analysis (at 448 per Malcolm CJ).
  • 106. In the case of the mining information, if the formulation of the hypothesis to be derived from Spencer incorporates the further assumption referred to in [102] above, the methodology would provide a range within which the hypothetical price, as the determinant of its market value, would be negotiated. That range would extend

    ATC 5904

    from a low point of zero for its retention by the hypothetical vendor or, in the alternative, an equivalent nominal amount on its sale to a purchaser not being the owner of the mining rights, to a high point of the cost (time delay cost as well as outlay) to the hypothetical purchaser of re-creating the mining information. The manner of determining the hypothetical price point within that range is a matter I return to later.

  • 108. In all cases, such an approach would satisfy the "highest and best use" principle embedded in the hypothesis to be derived from Spencer without recourse to changing what the clear text of the statute requires to be valued……

79. The Court noted (at [81]) that in relation to the "TARP issue", both parties called expert witness on matters of gold mining geology and valuation (comprising experts from Ernst & Young and Lonergan Edwards & Associates Ltd, for RCF, and experts from Romar Valuation Services Pty Ltd and Axiom Forensics Pty Ltd, for the Commissioner ( Experts )). The Court also had before it a joint report from the Experts ( EJR ) which was prepared following a conference or "Conclave" of the Experts chaired by the Honourable Kevin Lindgren AM QC.

80. At [114] the Court stated that the Experts had used the "residual" to calculate the market value of the TARP assets of SBM:

With a view to calculating the market value of SBM's TARP assets, the Experts started with a measure of the market value of SBM's total assets (EJR at [20]) and proceeded to the value of the mining rights as a residual item after deducting the assessed value of the non-TARP assets which, of course, included the "specialised assets" of mining information and plant and equipment. So much is illustrated in the tables at [32] of the EJR, reproduced at [123] below.

81. The Court analysed the way the Experts got to the common starting point of measuring the market value of SBM's total assets. The two broad bases used were the "market capitalization" method and the "discounted cash flow" (DCF) method. At [116] his Honour agreed with the majority of the Experts that "… the market capitalisation method is unreliable and the DCF method is to be preferred in assessing the market value of SBM's total assets".

82. In RCF, the Court accepted the cost of re-creating mining information method and rejected book values as a proxy for the "market value" of "mining information": see RCF at [129], [131], [133], [141], [142], [151] and [153].

83. The Court took a midpoint of the negotiating range to arrive at the "market value" of SBM's "mining information" as follows:

  • 156. For the purpose of valuing SBM's mining information on the hypothesis that it is the only asset offered for sale and on the further assumption referred to in [102] above, the hypothetical price of the mining information, as the determinant of its market value, would be negotiated in a range somewhere between a low point, being the amount to be realised by the hypothetical vendor if no transaction is done (zero), or an equivalent nominal amount on its sale to a purchaser not being the owner of the mining rights, and a high point, being the cost, time delay as well as outlay, to the hypothetical purchaser of re-creating the mining information.
  • 157. While there is an upper and lower point to the hypothetical negotiation range, there is no logical intermediate point guided by any business or financial principle. It follows, that if the task were to predict the outcome of such an actual negotiation, as a question of fact, the Court has no assistance and no evidentiary basis for doing so. But that is not the task here: the task under s 855-30(2) is to ascertain a market value, and the hypothetical sale transaction is no more than a useful and conventional method for doing so. I agree with RCF's submission that an appropriate basis for ascertaining market value in such a case is one which fairly arrives at a value, and that the fair valuation is one which shares equally between the holder, and the potential user, of the relevant asset the benefit to the user of immediate acquisition of the asset. That

    ATC 5905

    value is ascertained by dividing the notional "bargaining zone" equally. In this way, the hypothetical price of the mining information, as the determinant of its market value, is arrived at as a mid point between the maximum that the hypothetical purchaser, as the owner of the mining tenements, might pay to acquire the information (being the amount of outlay and the value of loss of cashflow suffered to re-create it) and the maximum the hypothetical vendor of the information could realise from any other disposal of the information.

84. Further, in RCF the Court refers (at [160]-[166]) to the residual intangible (or "marriage value") of the "specialised assets" - mining information, mining rights and plant and equipment, which the Court said is not a TARP asset.

Assistant Treasurer's Media Release

85. Finally, for completeness, the Tribunal notes the following recent development in relation to the PAT in s 855-30 of the ITAA 1997.

86. On 14 May 2013, the Assistant Treasurer announced, by Media Release No 2013/071, Attachment B (titled "Improving the integrity of Australia's foreign resident capital gains tax (CGT) regime"), proposed measures to amend the PAT in s 855-30 of the ITAA 1997, including:

  • • In determining the value of the Taxable Australian Real Property (TARP) assets of the entity in which the interest is held, intangible assets connected to the rights to mine, quarry or prospect for natural resources (notable mining, quarrying or prospecting information, rights to such information and goodwill) will be treated as part of the rights to which they relate.

87. The proposed amendment is part of an integrated package of measures which will apply to income years commencing on or after 1 July 2014 and, consequently, does not affect the Tribunal's reasons in this case.

VALUATION EVIDENCE

Introduction

88. The Assessment and the Objection Decision rely on the AVO Valuation of Abra as at 3 December 2007. The AVO Valuation was prepared by Mr Lonergan (then an employee of the AVO): T28 at pp 143-144, Table 11

89. The AVO Valuation uses the "residual method" to reach its conclusion that Abra passed the PAT on 3 December 2007. The "residual method" used by the AVO ascertains the "market capitalisation" of Abra as at 3 December 2007 and the market value of each of Abra's assets as at 3 December 2007.

90. The difference between the "market capitalisation" value of Abra and the sum of the fair market value of each asset of Abra, which can be measured objectively as at 3 December 2007, is the value of any "residual asset". Here, the "residual asset" is the value of the intangible created by Abra holding "mining information". Both parties accept that Abra's "mining information" is a TARP asset for the purposes of the PAT.

91. "Market capitalisation" is the accepted starting point of both parties in this case for the valuation of Abra's assets on 3 December 2007. However, AP Energy disputes the AVO Valuation of $10,000,000 for Abra's "mining information" as at 3 December 2007. Instead, AP Energy's contention is that Abra's "mining information" as at 3 December 2007 was $21,158,702 (as determined by Mr Longworth) such that Abra's TARP assets do not exceed its non-TARP assets as at 3 December 2007 and it fails the PAT. That is, AP Energy disputes in the AVO Valuation the allocation of $10,000,000 for "mining information" (and, consequently, the residual for mining rights of $27,250,703: see the Table in paragraph 96 below).

92. The material difference between the AVO value split of Abra's assets (as provided in the AVO Valuation) and the value split relied on by AP Energy is the "market value" of Abra's "mining information" and the resulting residual amount for Abra's mining rights and the intangible value created by Abra holding both mining information and mining rights.

Commissioner's valuation of Abra's assets

AVO Valuation

93. According to the AVO Valuation, using "market capitalisation" the AVO calculated Abra's total "market value" (or company enterprise value) on 3 December 2007 as $42,133,134: T28 at p135 at [31]-[32]. This


ATC 5906

calculation was derived by the AVO from the publically disclosed value as ascribed by trading in shares on the Australian Stock Exchange ( ASX ) as at 3 December 2007, including a 25% control premium: T28 at p135 at [28] to [35].

94. The AVO's calculation, as provided in the AVO Valuation was determined by the AVO (at T28 at p 135 at [31] and [32]) as follows:

Market Capitalisation *$33,256,526  
[*being 89,882,504 shares X closing share price as at 3 December 2007 of $0.37 per share: see AP Energy Documents at p197]    
Control Premium (25%) $ 8,314,131  
Total Liabilities * $ 562,476  
[*see T28 at p 139 at [52], Table 7]    
Total Market Value $42,133,134  

95. In determining the split of Abra's assets into TARP and non-TARP, the AVO referred to Abra's major asset categories as published in its Balance Sheet at 30 June 2007 (as extracted from Abra's "2007 Full Year Annual Report") as generally representative of the "market value" of Abra's various assets (T28 at p 140 at [53]-[54] and T28 at p 139 at [52], Table 7) as follows:

Cash and cash equivalents $ 4,112,015
[comprising wholly cash at bank and on hand]  
Trade & other receivables $ 66,463
[comprising GST paid and Deposit paid]  
Other current assets $ 14,639
[comprising prepayments]  
Property, plant & equipment $ 463,954
[after accumulated depreciation and impairment losses]  
Exploration costs carried forward  
[brought forward and current year] $ 8,410,387
Total assets at balance sheet value $13,067,458

96. The AVO calculated the market value of the TARP and non-TARP assets of Abra, as at 3 December 2007, as set out in the following table (T28 at p 140, Table 8 and T28 at p 144, Table 11):

Asset TARP $ Non-TARP $ Total $
Cash & equivalents 0 4,112,015 4,112,015
Trade & other receivables 0 66,463 66,463
Other assets 0 14,639 14,639
Property plant & equipment 92,790.80 371,163.20 463,954

ATC 5907

Goodwill 0 0 0
Future income tax benefits 0 64,816 64,816
Mining information 0 10,000,000 10,000,000
Mining rights 27,250,703 0 27,250,703
  $27,343,493.8 $14,629,096.2 *$41,972,590

* The "total'" figure in the above table should be $42,133,134 (and not $41,972,590), but there was an arithmetical error made in the residual figure for mining rights in the AVO Valuation.

97. The AVO reasoning for valuing Abra's "mining information" at $10,000,000 is outlined in the AVO Valuation (at T28 at pp 142-143 at [65] and [67]) as follows:

65. For the purpose of this investigation the exact level of mining information does not have to be determined . It is just to decide if Mining Information is likely to be greater than $16.4M on 30 June 2007 [sic] (for at this level the PAT test will fail). It is seen that this is highly unlikely. As the main Mining Lease was granted in 2000 and total expenditure on this lease is in all likelihood less than $16.4M. Two sources provide clarity that mining information is less than $16.4M this is the mining information lodged with the Western Australian Department of Mines EMITs system and the other source is the financial accounts (Note 10 of the 2007 June Financial Reports) .

98. In relation to the first "source", the AVO Valuation identifies and lists in a table (at [65]) a number of tenements and "Total Lodged Expenditure to 2009 - Department of Mines and Petroleum - EMITS ($)" totalling $6,755,013. It is unclear from this Table when the expenditure was incurred by Abra and when the expenditure report was lodged by Abra with the Department. No working papers were provided to show how this figure of $6,755,013 was calculated. Further, the Tribunal notes that this cost figure (of $6,755,013) is at odds with the reported exploration costs on Abra's balance sheet of $8,410,387 at 30 June 2007 (at T28 at p 139 at [52]) and $11,554,444 at 31 December 2007: AP Energy Documents at p 193.

99. As regards the second "source", the AVO Valuation states (at T28 at p 143 at [66]):

66. Note 10 of the Abra Mining Limited June 2007 Financial Statements report that 'Exploration Costs Carried Forward' was $8,410,387. If we allocate a further expenditure of $1,500,000 (a generous but reasonable assumption based on past expenditure). This would show expenditure of approximately $ 10,000,000.

100. Further, the AVO Valuation comments (at T28 at p 143 at [67] and [68]):

  • 67. For the calculations following in this report we have utilised a value of $10,000,000 for mining information, although we are of the belief that the actual value attributable to mining information when used in calculations of the PAT test in division 855 would be a significantly lower figure (and the AVO does not support this proxy, or the use of EMITs data to match the ATO definition of mining information however we do not see it as a clear indicator for an extreme upper value of mining information in this instance). The likely lower figure of mining information reduces Non-TARP further and does not effect the ultimate findings of this report.
  • 68. It is the AVO's opinion that due to the continued publishing of information (re: annual reports and ASX listing requirements), combined with the public nature of 'mineralisation reports' and other data lodged with the Department of Mines (particularly prior to Abra Mining holding the various tenements) that we can confidently state that significantly less than 16.4 million dollars of the total intangible assets of 37.5 million dollars should be applied to mining information as defined by the ATO. [Emphasis added]

101.


ATC 5908

The AVO drew its conclusion on the TARP/Non-TARP value split as set out at paragraph [96] above stating (at T28 at pp 143-144 at [69]-[70] and p 146 at [75]):
  • 69. The AVO is of the opinion that for this entity it is reasonable to use a residual method to value mining rights as at this date. Hence if we utilize an estimation of mining information and other intangibles as 10.1 million dollars - that we would ultimately value the mining rights to be 27.3 million dollars.
  • 70. The AVO concludes that on 3 December 2007 the maximum level of proportion of non-tarp is 35% and states with a high level of confidence that Abra Mining has more than 50% TARP assets .
  • 75. ………In generating this report the AVO did not determine the exact value of the various asset classes as it was seen to be excessively expensive and unnecessary in this instance. The proxy for the maximum value of mining information was seen to be the total expenditure on the premises following the acquisition of the rights. Minimal value was attributed to earlier information as it was seen to have been generally available from the Department of Mines or would have been in the public domain. The true value of mining information is expected to be less than the total expenditure on the tenements, as certainly their would have been some duplication of information as well as significant expenditure expected to have been spent on items outside the narrow definition of mining information contained in the ITAA 1997. For example some exploration expenditure could have been expensed for the development of generating a mine plan (not just the presence or absence of resources as defined in the act). [Emphasis added]

BDO Valuation

102. At the request of BDO Corporate Finance (WA) Pty Ltd, on 4 May 2011 Xstract prepared an independent valuation of the "mineral assets" of Abra. The BDO Valuation states, in the "Executive summary" (at p i):

……….The purpose of this report is to provide an impartial overview and assessment of the technical merits that might reasonably be expected to be applied by the market when considering an investment in Abra. Xstract has reviewed Abra's mineral assets holistically….

103. "Xstract's technique" in valuing Abra's mineral assets is described in the BDO Valuation (at p 36 at [3.5]) as follows:

In Xstract's opinion, there is no sufficiently detailed or accurate information available to reliably forecast the future cashflow from the Company's mineral assets. This opinion is based on the

  • • status of concept level studies completed at the Abra Deposit
  • • the early exploration status of the Company's other projects.

As such, Xstract doe not consider it appropriate to adopt an income approach to evaluate the Company's mineral assets.

As a result, Xstract has used a combination of the comparable transactions, joint venture terms, expected values and replacement cost methods to determine the current market value of the Company's mineral assets.

104. The BDO Valuation provides (at pp 44-45) the following "Valuation summary" of Abra's mineral assets:

3.9 Valuation summary

In deriving its preferred value and range for Abra's mineral assets, Xstract has used a variety of valuation methodologies. As each valuation methodology has its own strengths and weaknesses, and hence it is generally accepted as a best practice to apply as many methods as possible under the relevant time and circumstances. On this basis, Xstract has used both market and cost based approaches to arrive at is preferred value of A$50.06 M within a range of A$35.58 M to A$64.44 M for Abra's mineral assets. Xstract's valuation is summarized in Table 3.13

Mr Lonergan's December 2012 Expert Report

105. The essence of Mr Lonergan's December 2012 Expert Report (annexed to Mr Lonergan's December 2012 Witness Statement) is that Mr Lonergan does not agree with Mr Longworth. Mr Lonergan alleges that Mr Longworth has failed to undertake work to


ATC 5909

further explain his approach, calculations and valuation.

106. With reference to the MKT Valuation Report (and, in particular, Xstract's "preferred value" for Abra's mining information: refer to the Tables in [116] and [119] below), Mr Lonergan's December 2012 Expert Report concludes (at p 14):

6. Conclusion

  • 6.1.1 Ultimately it must be asked whether an independent buyer in the market pay $18.2 million dollars (or 44% of the value of the company) for the mining information alone as at 3 December 2007. The answer in my opinion is clearly no; hence I do not support the outcome of the Xstract valuation.
  • 6.1.2 It is my opinion that the outcome of Xstract's report should be lower as there should be greater weighting to:
  • 6.1.3 If the valuation is to be based on this methodology; I believe some more rigour should be applied in regards to optimizing, depreciating and determining the replacement cost before coming up with a market value.
  • 6.1.4 As at the valuation date Abra Mining was an exploration company and as historical evidence indicates a large number of these firms fail completely. The significant upside of these companies often lies behind the 'hope' that further resources will be found and this value is typically found in the mining right.

AP Energy's valuation of Abra's "mining information"

107. As discussed, AP Energy relies on the valuation evidence of Mr Longworth in support of its view that Abra did not pass the PAT as at 3 December 2007. In particular, AP Energy relies on the evidence of Mr Longworth to support its assertion that the "market value" of Abra's "mining information" as at 3 December 2007 was $21,158,702 (and not $10,000,000 as stated in the AVO Valuation and as contended by the Commissioner in these proceedings).

Mr Longworth

108. Mr Longworth has a BSc (Hons) (Geology) from the University of Sydney and is a member of the Australasian Institute of Mining and Metallurgy: Mr Longworth's CV at p 8. Mr Longworth is currently the General Manager Perth and Principal Consultant of Xstract which is "a multi-discipline privately owned and operated mining and resource industry consultancy providing independent, strategic and tactical advice and personalised professional services to exploration and mining companies, engineering firms, financial institutions and investors": Mr Longworth's CV at p 8.

109. Mr Longworth's CV provides (at p 8) the following "Summary" of his background and experience:

[Mr Longworth] is a geologist with 25 years' experience across exploration, project evaluation/development, operations and corporate management. He previously held roles as Exploration Manager, COO and CEO/Managing Director within Australian listed companies, and mining analyst with a boutique investment fund. His experience encompasses gold, base metals, nickel, uranium and coal in Australia, China, North America, South America, the UK and South East Asia. In his senior corporate roles he led multidisciplinary project evaluation and development teams, additionally he listed a series of companies realizing value for shareholders, participated in significant fundraisings and corporate transactions providing the link between technical and corporate advisors. He combines Board level experience with strong technical and commercial background. [Mr Longworth] is a Member of the AusIMM and Australian Institute of Company Directors.

110. Mr Longworth's "Experience" is described in Mr Longworth's CV (at p 9) as including "evaluation".

MKT Valuation Report

111. On 16 April 2012, AP Energy's lawyers, MKT - Taxation Advisors ( MKT ), wrote to Mr Jeames McKibben of Xstract regarding the preparation of an expert witness report on the value of Abra's "mining information" on 3 December 2007: see MKT Brief at p 1. The MKT Brief informed Mr McKibben (at p1) that:

The issue upon which expert and opinion evidence is required is the valuation of mining information as an asset in its own


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right, that is separate and distinct from mining rights.

112. The MKT Brief explained MKT's understanding of the "residual method" used by the AVO/ATO to value mining rights in this case and expressed the following view (at p 2):

In our view, it follows that expert opinion can focus on the appropriate measure of the value of the mining information rather than provide a valuation of the mining rights.

113. Further, the MKT Brief stated (at p 2) that in valuing Abra's "mining information", the following 3 matters may need to be addressed:

  • • Whether the multiple of exploration expenditure ('MEE') method can be used, and if so, the multiple or discount which should be applied to the expenditure incurred.
  • • Whether the opportunity cost associated with replicating an exploration programmed can be factored into the valuation of mining information;
  • • Whether the residual method……….needs to be further apportioned between mining rights and mining information.

114. Following Mr McKibben's receipt of the MKT Brief, Mr Longworth was identified within Xstract as the most appropriately qualified consultant geologist to undertake the MKT Brief and value Abra's "mining information" as at 3 December 2007 (i.e. to prepare the MKT Valuation Report). In this regard, Mr Longworth's September 2012 Witness Statement states:

  • 6. …….The request on 16 April 2012 from MKT Taxation advisors for a cost-based valuation of mining information was addressed to Jeames McKibben, a General Manager and Principal Consultant with Xstract in Brisbane.
  • 7. Jeames McKibben contacted me inviting me to take on the instructions as I have the knowledge and experience required for a cost-based valuation of mining information.
  • 8. More particularly, I have long experience in evaluating and assessing resource transaction costs, costing and budgeting for mining exploration and development, evaluating tenements and preparing and evaluating project acquisition tenders and disposals, as well as knowledge of how such costs have moved over time.
  • 9. I have spent more than 15 years in senior management roles for junior exploration and development companies assessing (valuing) projects for acquisition and divestment. Over a 25-year career, I have been continually involved in the assessment of exploration activities, of expenditure and evaluation (valuing) of mineral properties, mostly in Western Australia. I have, on several occasions, authored reports and attended Warden's Court on matters of a similar nature to the present matter.

  • 11. Having informed Jeames McKibben that I would take on the instructions, I assessed what information was required. I then enlisted Richard Price to manage the matter as a project and John Everard to collect data required.
  • 12. As Project Manager, Richard Price was required to attend to the mechanics of doing the work. That is, delivery on time with the resources and budget needed. Richard Price was not the principal consultant giving the opinion and responsible for the content of the report.
  • 13. I directed and controlled the data collection and analysis. I directed John Everard to the sources of information and how to obtain necessary informationI was checking and testing the data John Everard extracted and collected and I was satisfied it was accurate.

  • 15. Using that data I then considered and determined what was the appropriate value to place on the mining information and arrived at my preferred view as set out in my report.

  • 19. …….the report expresses my own expert opinion arrived at based on work that I designed, guided and validated.

115. Mr Longworth's valuation of Abra's "mining information" as at 3 December 2007


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is provided in MKT Valuation Report read together with Mr Longworth's Supporting Data.

116. The "Executive summary" in the MKT Valuation Report states (at p 1):

At the request of [MKT], [Xstract] has prepared a cost-based valuation of [Abra's] mining information relating to the Company's projects as at 3 December 2007….

Based on a review of publicly available information relating to exploration activities carried out on Abra's projects since 1982, Xstract has estimated Abra's exploration expenditures and then applied a series of inflation factors and discounts. The discount reflects the reliance on the use of public domain data, whilst the inflation factors were used to estimate the relevant costs as at the key date (sic) of 3 December 2007…….

Xstract's valuation of Abra's mining information at the date (sic) requested is summarised below.


Table 1.1 - Valuation summary - 3 December 2007
Table 1.1 - Valuation summary - 3 December 2007
Discount CPI 3.5% escl. 5.8% escl.
0% AUD17,594,096 AUD20,552,400 AUD29,048,322
12.5% AUD15,394,834 AUD17,983,350 AUD25,417,282
25% AUD13,195,572 AUD15,414,300 AUD21,786,242
Xstract's Preferred Value AUD18,199,000

117. Xstract's approach to valuing Abra's "mining information" and the summary of its valuation of Abra's "mining information", as outlined in MKT Valuation Report (at pp 7-9), is as follows:

Xstract has adopted a sunk cost method to determine the value of Abra's mining information as at [3 December 2007]. The premise of this method relies upon determination of the company's exploration expenditure over the period of existence of the tenements and then inflating to the valuation date (Sic.) requested (i.e. 3 December 2007…). This methodology is considered sound for determining the value of mining information as it essentially depicts the approximate dollar value of replicating all the known information about the tenement as at the relevant date. Furthermore, to maintain its holding in the relevant tenements Abra was required to submit annual reports outlining activities and incurred expenditures to the Western Australian Department of Industry and Resources (now the Department of Mines and Petroleum). This data is available and within the public domain.

In addition to the inflation factors applied, Xstract has also applied a discount to account for the use of public information. It is widely acknowledged in the industry that publically available data is not as rich in content as the data held by the creator. A potential purchaser of the tenements is likely to apply such a discount when valuing such publically available mining information….

Xstract expects the market would apply a discount between 0% and 25% to account for the use of publicly available information and an average annual inflation rate of between CPI and 5.8% to account for the increase in exploration costs over the period 1983 to 2008. In this instance, Tract has selected a public data discount range of 12.5% to 25% and used these values with CPI and annual escalation of 3.5% and 5.8% to triangulate a valuation range.

118. The MKT Valuation Report provides the following summary (at p 9) of Xstract's valuation methodology:

As at 3 December 2007, Xstract estimates the value of Abra's mining information lies


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in the range AUD13,195,572 to AUD25,417,282.

In determining its preferred value, Xstract has adopted the mean of the defined value range. Xstract considers the mean of the value range to be the most appropriate method to establish a preferred value, as the median would not apply to such a small dataset.

119. Xstract's valuation of Abra's "mining information" as at 3 December 2007 is summarised in the MKT Valuation Report (at p 10, Table 5.1) as follows:


Table 5.1 - Valuation summary - 3 December 2007
Table 5.1 - Valuation summary - 3 December 2007
Discount CPI 3.5% escl. 5.8% escl.
0% AUD17,594,096 AUD20,552,400 AUD29,048,322
12.5% AUD15,394,834 AUD17,983,350 AUD25,417,282
25% AUD13,195,572 AUD15,414,300 AUD21,786,242
Preferred *AUD18,199,000    

* Mr Longworth's January 2013 Witness Statement provides an amended valuation correcting a calculation error identified by Mr Lonergan and correcting an error in calculation in the MKT Valuation Report which arose because an exploration expenditure report dated 16 January 2008 was not identified as reporting exploration expenditure for the tenement year ended 21 December 2007 and consequently $3,269,508 of relevant exploration expenditure was excluded from Mr Longworth's initial calculations of value for of Abra's mining information: see Mr Longworth's January 2013 Witness Statement at p 2 and p 10 and its annexures.

On the basis of the correction to Mr Longworth's calculations, his valuation of Abra's "mining information" as at 3 December 2007 increases from $18,199,000 to $21,158,702: see Mr Longworth's January 2013 Witness Statement at p 2 and p 10 and its annexures.

120. The MKT Valuation Report further provides (at pp 10-11):

As per [the MKT Brief], Xstract has considered the matters requested of it by MKT….

Specifically, Xstract considers that the MEE approach is not appropriate to apply to the valuation of mining information only as the method values the entire mineral asset (i.e. mining right and supporting information).

Xstract considers that the ability to incorporate an opportunity cost associated with replicating an exploration program will be contingent on the richness of the information available in the public domain……….It is our view that the public domain data from Abra is not sufficiently detailed to recreate the defined Mineral Resources with any high measure of confidence at the relevant dates. We have factored this opportunity cost with the use of the public data discount range in the valuation analysis.

Xstract is not aware of any common practice that further applies any factors to mining information versus mining rights in the valuation of a mining company via the Residual Method.

Mr Longworth's January 2013 Witness Statement

121. Mr Longworth's January 2013 Witness Statement is essentially a response by Mr Longworth to the criticisms made by Mr Lonergan, in Mr Lonergan's December 2012 Expert Report (annexed to Mr Lonergan's December 2012 Witness Statement), of the valuation methodology adopted by Mr Longworth in the MKT Valuation Report. This response was, as discussed below in paragraph 146, expected and encouraged by the Commissioner.

122. The attached commentary to Mr Longworth's January 2013 Witness Statement


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identifies (at p 4) the key areas where Mr Longworth disagrees with the Mr Lonergan's December 2012 Expert Report, as follows:
  • • The assertion that mining information generated on areas with no (retained) mining right has no value;
  • • That failed exploration has no value;
  • • That a mining right has significant value (of itself, or compared to the mining information); and
  • • That certain expenditures to obtain mining information cannot form part of the cost of mining information.

123. In reply to Mr Lonergan's challenge to his methodology for valuing Abra's "mining information", the attached commentary to Mr Longworth's January 2013 Witness Statement states (at p 5 and p 7):

The sunk cost valuation method is the most appropriate. That is, the cost to recreate the mining information at the valuation date. The basic premise of this method is the data does not exist and may never have existed. There is no opportunity to optimise the collection of mining information, nor to consider a differential value for positive and negative results. There is no clear, transparent, open marketplace for Mining Information. The appropriate proxy for this information is the cost of drilling, assaying, geophysical surveys, geochemical surveys, geologist and support staff salaries, and all other exploration methods and mining information collection…….There are two options to arrive at a cost to recreate the mining information at the valuation date. Firstly, to take the actual reported costs of the explorers to create the information in the first place and escalate them to dollars of the day of the Valuation Date and then to apply an absolute discount based on the reasons stated in the Xstract Report [i.e. the MKT Valuation Report]. The second was to apply subjective estimates of exploration costs at the valuation date to the actual quantities of mining information available.………In selecting the actual reported cost approach, my decision was informed by the fact that the Form 5 expenditure is supported by a statutory declaration at lodgement. There is active Plainting where a third party may dispute the claimed expenditure in the Warden's Court, potentially resulting in loss of a mining, quarrying or prospecting right ("Mining Right"). This valuation is of Mining Information only - one of the components creating value for a mining asset……

………

Valuation using the sunk cost method removes the intangible or goodwill which may be intertwined with the Mining Right in a whole asset valuation. This intangible is the value created by the Mining Information and is not the value of the information itself. This goodwill value relies on sentiment, commodity prices and the promotional skill of management. This intangible may have very significant positive or negative value and may change for external factors not related to the underlying Mining Information. It is possible to argue that this value is part of Mining Information. In my opinion, the value of a mining asset is the combination of the value of the Mining Information, the Mining Right and intangible goodwill (which may vary significantly based on the interpretation of the results of the mining information). When both the Mining Right and the Mining Information are valued on a sunk cost basis, one being very small and one being larger, one is left with the intangible.

124. The attached commentary to Mr Longworth's January 2013 Witness Statement concludes (at p 11):

I contend that my process calculates a conservative mid-point for mining information, and given the value of Mining Right (for an exploration company) is nominal, the conclusion in my expert opinion as a Competent geologist following best practice under the VALMIN Code, is that an arm's length transaction of the Mining Information alone would be AUD21.16 M at the Valuation Date [i.e. 3 December 2007].

The valuation as produced by myself at Xstract is AUD21,158,702.


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AP Energy's position

125. As discussed, AP Energy generally accepts the values of Abra's assets provided in the AVO Valuation value as a fair objective measure of the market value of those assets as at 3 December 2007. The main exception taken by AP Energy to the AVO Valuation is the value of $10,000,000 given to Abra's "mining information" (and, consequently, the residual for "mining rights" of $27,250,703): see paragraph 96 above.

126. That is, using "market capitalization" the AVO calculated Abra's total market value as at 3 December 2007 at $42,133,134: see T28 at p 7, Table 2. This "total market value" or "company enterprise value" for Abra is accepted and not disputed by AP Energy because the method is accepted by valuers and the value is reasonably and objectively calculated using the quantity of Abra's issued shares and closing share price on 3 December 2007: see S1 at p 23 at [88] and [90], Romar Valuation Services Pty Ltd Draft "Valuation of Intangible Assets Impacting Division 855 Discussion Document", dated 27 February 2009 ( Romar Report ). Further, according to AP Energy, the "control premium" applied in the AVO Valuation (of 25%), while distant from the range of 10% - 20% acceptable to valuers (see S1 at p26 at [115], Romar Report), is accepted by AP Energy, but noting that the 25% is generous to the Commissioner's position in the calculations for the PAT in this case.

127. AP Energy notes that the AVO Valuation incorrectly values the asset item "future income tax benefits". That is, AP Energy takes the view that in calculating the value of this asset the AVO used an incorrect tax loss position for Abra and have substantially understated the value of this asset. The AVO estimated Abra's tax loss position at $4,037,298 million using Abra's accounting losses as a proxy: see T28 at pp 140-141 at [59], Table 9. According to AP Energy, accounting losses do not reflect capitalised exploration costs which are immediately tax deductible for income tax purposes; so tax losses had to be around the accounting losses mark plus the capitalised exploration costs at 30 June 2007 of $8,410,387. However, since the dispute value difference in this asset will not affect the outcome of the application of the PAT in this case, AP Energy does not press this difference with the Tribunal.

128. Apart from the figure for "exploration costs" in Abra's Balance Sheet at 30 June 2007 (as set out in the AVO Valuation Report at T28 at 139, Table 7), which AP Energy notes is an historical cost accounting number and does not reflect specialized knowledge and best practice in placing a fair market value on a mineral asset, AP Energy accepts (subject to the paragraphs [124] and [125] below) that the other asset values in Abra's Balance Sheet at 30 June 2007 reflect a fair market value for cash items and depreciated plant and equipment.

129. AP Energy ascertained from Abra that its "cash balance" at 3 December 2007 was $2,190,737 (see AP Energy Documents at p 269) and it has substituted this cash value in its allocation of value to Abra's TARP and Non-TARP assets as presented in the following table. To not make this substitution would, AP Energy says, result in double counting a Non-TARP asset as Abra's Half Year Balance Sheet and Half Year Cash Flow Statement at 31 December 2007 (being a date closer to the valuation date) indicate a cash reduction by valuation date to fund further exploration costs which increased to $11,554,444: see AP Energy Documents at pp 193 and 195.


AVO estimate of enterprise value $ 42,133,134  
Non-taxable Australian real property (non-TARP )    
Cash [actual at 3 December 2007] 2,190,737  
Trade and other receivables [per AVO - 30 June 2007 Balance Sheet] 66,463  
Other current assets [per AVO - 30 June 2007 Balance Sheet] 14,639  

ATC 5915

Plant & Equipment [per AVO - 80% of 30 June 2007 Balance Sheet] 371,163  
Future income tax benefits [per AVO, but note paragraph 124 above] 64,816  
Goodwill [per AVO] 0  
Mining Information [per M Longworth - MKT Valuation] 21,158,702  
[market value using sunk/replication cost method]    
  23,866,700 56.65%
Taxable Australian real property (TARP)    
Plant & Equipment [per AVO - 20% of 2007 B/S] 92,791  
Mining, prospecting or quarrying right (the residual of enterprise value) 18,173,643  
  18,266,434 43.35%

130. Based on the above breakdown, AP Energy submits that its membership interest in Abra (as at 3 December 2007) was not TARP such that it is entitled to disregard the capital gain arising on the part disposal of its shares in Abra to Hunan on 3 December 2007.

131. More specifically,, AP Energy contends that the Tribunal should:

  • • reject the AVO Valuation of $10,000,000 for Abra's "mining information" as at 3 December 2007; and
  • • accept that the market value of Abra's mining information as at 3 December 2007 is $21,158,702 as determined by Mr Longworth who is qualified with specialized knowledge to ascertain the value of a mineral asset independently, objectively and according to best practice.

132. In summary, AP Energy asserts that the AVO Valuation of $10,000,000 for Abra's "mining information" should be rejected by the Tribunal for the following reasons:

  • • The AVO Valuation of $10,000,000 for Abra's "mining information" is not a "fair market value" of Abra's "mining information", nor is it a suitable proxy for a "fair market value";
  • • The AVO Valuation of $10,000,000 for Abra's "mining information" is not a reasonably and objectively determined "market value" but, rather, is a perfunctory valuation of Abra's "mining information" using a balance sheet historical cost number.
  • • The AVO Valuation of $10,000,000 for Abra's "mining information" is not a market value but a valuation based on historical cost with an estimate of cost incurred for the period 1 July 2007 to 3 December 2007, when balance sheet values for "exploration expenditure" are not accepted by valuers as a proxy for a market value: see S1 at p 50 at [256], Romar Report.
  • • At the time of the AVO Valuation of $10,000,000 for Abra's "mining information" (on 14 October 2009) the AVO who prepared the AVO Valuation (Mr Lonergan) had no specialised expertise (including the senior valuer who countersigned Mr Lonergan's work) or guidelines in relation to the valuation of mineral assets. The AVO's valuation of Abra's "mining information" comprehends and engages only what the author (Mr Lonergan) considered obvious, informed by his own very limited knowledge and experience of mineral asset valuation;
  • • The AVO's valuation of Abra's "mining information" is a value for a mineral asset that has not been determined thoroughly using industry best practice with the assistance of a qualified geologist with specialized knowledge in exploration and without informed and realistic consideration of the nature of the mineral asset and the market for "mining information";
  • • At the time of the AVO Valuation of $10,000,000 for Abra's "mining information" Mr Lonergan had very little valuation experience (20-22 months employment with the AVO) and no specialised knowledge in geology, minerals exploration and recovery and mineral asset

    ATC 5916

    valuation. His valuation of Abra's "mining information" was not assisted by specialised knowledge as to the nature of mining information, the market for mining information and the use of mining information by prospective purchasers;
  • • Mr Lonergan offered no reasonable explanation for not seeking specialised assistance when preparing the AVO Valuation of $10,000,000 for Abra's "mining information". He also offered no reasonable explanation for not seeking specialised assistance before providing his adverse commentary on Mr Longworth's valuation to the Tribunal: see Mr Lonergan's December 2012 Expert Report. His statements that cost considerations warrant a perfunctory valuation are extraordinary when a substantial tax liability is at stake;
  • • The curriculum vitae which Mr Lonergan provided to the Tribunal was not updated, in cross-examination he informed the Tribunal that his associate membership of the Securities Institute of Australia (now FINSIA) had lapsed, and he did not know when this occurred. He also could not state when he commenced and finished working with the AVO. Through the course of the hearing he made no effort to clarify his curriculum vitae for the Tribunal on these material matters. What was clear was that his supervised valuation experience amounted to a maximum of 20-22 months experience with the AVO and much of the work he did during his time at AVO was "limited scope" Division 855 valuations for the ATO;
  • • Mr Lonergan's assertion that the VALMIN Code was not relevant to his limited scope valuation of Abra's mineral asset and eschewing any suggestion that the AVO Valuation of Abra's mineral asset was not best practice. Further, asserting that the VALMIN Code was not best practice for someone who was evidently an Associate of the Securities Institute of Australia, an organisation that "supports the Code as indicative of best practice for independent experts preparing valuations and assessments in relation to specialist mining reports": see VALMIN Code at p 2; and
  • • Actual and/or the perception of lack of independence by Mr Lonergan and his advocacy for the respondent. Mr Lonergan worked closely with ATO officers in relation to Division 855 valuations while he was at the AVO (see ST2 at p 62, ST3 at p 64 and p 80, ST4 at p 81 and ST6 at p 87 and compare the statements of the Inspector-General of Taxation in his "New IGT Work Program" of 10 October 2012 under the heading "Review of the ATO's Interaction with the Australian Valuation Office". Mr Lonergan told the Tribunal that while at the AVO he was asked by a senior ATO officer to apply for a position in the ATO and he did so transferring to the ATO late in 2009. Since then Mr Lonergan has worked and continues to work in the ATO as a Technical Leader giving technical advice in relation to Div 855 and other matters, including "policy work" generating interpretative material and recommendations for legislative change. During this time he undertook a 12 month secondment (July 2011 to Aug 2012) with the Resources Rent Tax Team in Treasury working on the development of the Minerals Resource Rent Tax. Since joining the AVO in 2008, Mr Lonergan's entire focus has been around government revenue collection.

133. Further, in support of its contention that the AVO Valuation of $10,000,000 for Abra's "mining information" as at 3 December 2007 should be rejected by the Tribunal (and Mr Longworth's valuation of $21,158,702 for Abra's "mining information" as at 3 December 2007 should be accepted), AP Energy notes that in cross-examination:

  • • Mr Lonergan, the author of the AVO Valuation, stated that the level of confidence he was expressing in the AVO Valuation was not determined using AVO guidelines which set out objective measures to use for assessing confidence in a value ascertained for a mineral asset.
  • • Mr Lonergan's confidence was subjective and intuitively arrived at on Mr Lonergan's assessment of what he expected someone would pay for mining information that is publicly available from the Department of Mines and what proportion of a mining

    ATC 5917

    company's value such publicly available mining information ought attract.
  • • Mr Lonergan dismissed the views of other valuers that balance sheet exploration cost was not a measure of market value: Transcript at pp 56-57. He also rejected any suggestion that his valuation of Abra's mining information as a mineral asset was not best practice and that he should have sought the assistance of specialist advice.
  • • Mr Lonergan dealt with suggestions that he was now unable to weigh matters independently and objectively from another perspective, by asserting that the ATO had no position and no view in relation to relevant aspects of Division 855 of the ITAA 1997 and the valuation of mining assets: see Transcript at pp 58-68.
  • • Mr Lonergan said on a number of occasions that if he had unlimited funds he would have done things differently: see Transcript at pp 36-71 and pp 76-92.

134. AP Energy's Written Submissions state (at p 12 at [31(h)]:

Mr Lonergan's advocacy for the respondent is evident in his report on Mr Longworth's valuation [Ex R4] in which he challenges Mr Longworth's approach on bases which Mr Lonergan himself failed to address in the AVO report and in determining the AVO value. In addition, his advocacy for the respondent was evident throughout his oral evidence. While giving evidence Mr Lonergan was evasive regularly failing to directly answer the question put to him and either giving an irrelevant answer or answering by formulating his own question and answering the question he was prepared to answer.

Commissioner's position

135. As stated above, the basis of the Commissioner's decision in respect of the PAT is set out in the Objection Decision which refers to and relies on the AVO Valuation (prepared by Mr Lonergan, then employed by the AVO).

136. According to the Commissioner, in determining the value of Abra's TARP and non-TARP components of an enterprise and Abra in particular, the ITAA 1997, on its plain reading, requires an approach whereby the two classes of assets are compared. The residual approach to valuation is not normally appropriate, as being likely to overstate the value of mining information and understate the value of mining rights. The Commissioner written submissions, dated 22 February 2013 ( Commissioner's Submissions ) state (at p 9 at [29]):

29. The Commissioner's position in respect to the appropriate methodology is unchanged. Whilst in this matter a residual valuation method has been used by the AVO in undertaking the limited scope valuation engagement, and it is relied on by the respondent in support of his decision, that is not support for the proposition that a residual valuation methodology is appropriate for a taxpayer to use to meet the onus it has in objecting to the Commissioner's decision. It is a matter for the applicant to demonstrate to the requisite standard that they pass the legislative test and prove the appropriate methodology they contend for doing so.

137. The Commissioner accepts neither the expertise of AP Energy's witness, Mr Longworth, nor the appropriateness of the methodology he relies on: Commissioner's Submissions at p10 at [33].

138. The Commissioner contends that AP Energy's expert reports fail to meet the AAT Guidelines on Opinion and Expert Evidence for a number of reasons, including:

  • • Whilst "valuation" is a recognised area of specialist knowledge on which opinion evidence would ordinarily be admissible, nothing has been provided which substantiates the claim that Mr Longworth has valuation expertise. His knowledge, education and expertise identifies him as a geologist with expertise in mine management, costing, budgeting and related fields, not valuation.
  • • Mr Longworth was directed by the applicant to use a cost-based methodology. He ignores the legislation which requires a market valuation and a summation approach, and he did not undertake a market valuation.
  • • Paragraphs 10(b) and (c) of the AAT Guidelines of Expert and Opinion Evidence have not been complied with.

    ATC 5918

  • • The tests, calculations and other investigations that have been carried out are poorly explained and are not transparent; for example, there is no cross-referencing between the report ExA3 and the working papers ExA2 so that the Tribunal can see where the figures used in the reports are calculated; it is not enough to simply tender the working papers and say to the Tribunal, as the applicant appears to, "its all here, work it out for yourself". This is all the more so when it is obvious that "everything" is not included in the report: Transcript at p 20 at [22]-[46] and p 21 at [1] to [6], and where even someone who has had the opportunity to go through the materials in detail cannot understand on what basis the discount rates of 12.5% and 25% (being an effective rate of 18.75%) were selected: Mr Lonergan's December 2012 Report at p 5 at [3.3]; Transcript at p 80 at [10], p 81 at [30], p 81 at [30] and p 94 at [23]-[30]. Mr Longworth's January 2013 Witness Statement does nothing to illuminate this.
  • • There is no information in any of the reports of the qualifications or experience of those who assisted Mr Longworth: see Commissioner's Submissions at pp 10-11 at [35].

139. According to the Commissioner, the MKT Valuation Report ought to be accorded little weight by the Tribunal for the reasons set out above and because, amongst other things:

  • • There is no basis for the use of the methodology adopted in the MKT Valuation Report, other than being directed to do so by the client.
  • • No attention is paid in the MKT Valuation Report to the concept of "market value", as required by the ITAA 1997. Indeed, Mr Longworth does not consider market value: Transcript at p 21 at [46] and p 23 at [10].
  • • Change in ownership of tenements from 1982 to 3 December 2007 is not accounted for.
  • • No discount is given for the reduction in size of the tenements over time and therefore the lost or unnecessary costs incurred in respect to the portions of tenements not owned by Abra at 3 December 2007.
  • • No valuation of the total value of Abra was undertaken in the MKT Valuation Report: Transcript at p 22 at [40].
  • • No valuation is given for the mining rights; indeed mining rights were not considered: Transcript at p 22 at [43].
  • • Mr Longworth is not able to give an opinion as to the meaning of various provisions in the Mining Act, as he seeks to in Mr Longworth's January 2013 Witness Statement.
  • • The wide range of the "values" ascribed by Mr Longworth typically speak of a lack of confidence in the value ascribed, a criticism of his report identified by Mr Lonergan in Mr Lonergan's December 2012 Witness Statement in Ex R4 (in section 3.8 titled "Selection of value from range"), and which was not contradicted by Mr Longworth in his responsive report, Mr Longworth's January 2013 Witness Statement: Commissioner's Submissions at pp 11-12 at [36].

140. The Commissioner submits (see Commissioner's Submissions at p 13 at [39]) that doubt must be cast on the reliability of the MKT Valuation Report when comparison is made between it and the BDO Valuation. Mr Longworth knew about the BDO Valuation at the time of drafting the MKT Valuation Report: Transcript at p 18 [36] and p 19 [2]. The project manager for the BDO Valuation was Mr McKibben, who conducted the peer review of the MKT Valuation Report, which included a review of consistency of approach: Transcript at p 19 at [30]-[40]. When Mr McKibben undertook that peer review, he "did not question [the] approach and conclusion": Mr Longworth's September 2012 Witness Statement at [18].

141. According to the Commissioner (see Commissioner's Submissions at p13 at [39]):

  • • The sections of the BDO Valuation which deal with the "Replacement Value" method (parts 3.6.3 and 3.7.2) adopt the same methodology as that adopted by Mr Longworth in the MKT Valuation Report, namely to collect the base data from the Department of Mines and make adjustments

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    to it: Transcript at p 21 at [41]-[45] and BDO Valuation at pp 42-43.
  • • The cost-based approach used in the MKT Valuation Report was used in the BDO Valuation as a cross-check, but no cross-check was used in preparing the MKT Valuation Report: Transcript at p 21 at [25] to [33].
  • • Table A (attached to the Commissioner's Submissions, but not reproduced in these reasons) compares the exploration expenditure data from the Department of Mines (in the BDO Valuation) with that used to calculate the value of mining information in the MKT Valuation Report. The raw data in each of the BDO Valuation and the MKT Valuation Report are different for 14 of the 17 comparable data sets, a fact of itself which must bring into question the reliability of the MKT Valuation Report.
  • • A further issue made clear by Table A (attached to the Commissioner's Submissions, but not reproduced in these reasons) is that the total expenditure (the raw data) for the same tenements in the same periods differs substantially between the BDO Valuation and the MKT Valuation Report.
  • • Despite having looked at the BDO Valuation in the preparation of the MKT Valuation Report, and despite Mr McKibben being satisfied as to consistency of approach between the two reports, Mr Longworth fails to explain in the MKT Valuation Report why raw data for the same periods from the same source differs so markedly between the two reports. This discrepancy could have been explained in the course of preparation of the MKT Valuation Report through the peer review process, but not in cross-examination: Transcript at p 19 at [8]-[20].
  • • In the context of Mr Lonergan's unanswered criticism of the very wide range adopted by Mr Longworth, it is worth noting that the ranges adopted in the BDO Valuation (at [40] and [43]), are far narrower than the range in the MKT Valuation Report.

142. The Commissioner notes that whilst Mr Longworth in the MKT Valuation Report, and the authors of paragraphs 3.6.3 and 3.7.2 of the BDO Valuation, have adopted the same method of calculating the replacement or replication value in those two reports, the application of that method and the results obtained are inconsistent between them. This demonstrates an inconsistent approach to the same valuation task, i.e. calculating a cost based replacement value of the data: Commissioner's Submissions at p 14 at [40]. That is, according to the Commissioner (see Commissioner's Submissions at pp 14-15 at [41]), in calculating the value of Abra's "mining information" in the MKT Valuation Report, Mr Longworth took the base data, escalated it (i.e. increased it) for inflation, using CPI and the further figures of 3.5% and 5.8%, so as to calculate its "present value", and then discounted that figure by the selected percentages of 12.5% and 25% for publicly available information: MKT Valuation Report at pp 8 - 9.

143. In contrast, the Commissioner asserts (see Commissioner's Submissions at p 15 at [42]), in the BDO Valuation (at p39 at [3.6.3] and pp 42-43 at [3.7.2]):

  • • the same sourced base data has been obtained (albeit, the actual numbers are different; and
  • • those source figures have been escalated, by different inflation amounts to those used in calculating the value in the MKT Valuation Report: compare the BDO Valuation at p 40 at [3.6.3] first, third and fourth dot points;
  • • discounted, to account for the fact that the data would be quicker to obtain with the benefit of hindsight: BDO Valuation at p 40 at [3.6.3], second dot point;
  • • discounted by 15%, to "reflect the affect of age on the usefulness of old data in the mineral estimate process": BDO Valuation at p 40 at [3.6.3], second last dot point; and
  • • discounted, to also "account for the proportion of the work which would be reproduced with the benefit of hindsight": BDO Valuation at p 40 at [3.6.3], last dot point; and

    because much of the prior expenditure is associated with target generation and initial reconnaissance assessment and


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    hence is unlikely to be replicated: BDO Valuation at p 43.

144. As a result, the Commissioner assertion is that in the MKT Valuation Report (as amended by Mr Longworth's January 2013 Witness Statement) the range of values starts with a low value of $15,229,763, which is only slightly below the calculated actual expenditure (the "Total nominal" figure of $15,839,468 on the annexed "corrected spreadsheet"), and ranges upwards to a value of $29,209,723, which is almost double the actual expenditure, and calculates a preferred value as the mid-point between these two already over-inflated figures. By contrast, in the BDO Valuation the value range is substantially lower than the total actual expenditure of $22,134,292 at both the bottom and top ends, which reach values between $11.51 million and $14.16 million. Consequently the preferred mid point value of $12,830,000 is also substantially lower than the total actual expenditure. Whilst the actual figures are not directly comparable because of the different timeframes for the valuations, the methodology used and the type of results reached ought to have been, but are not, consistent: see Commissioner's Submissions at pp 15-15 at [43].

145. Finally, the Commissioner contends that there is no basis to suggest, as submitted by AP Energy, that Mr Lonergan adopted an "ATO view" in his approach to the AVO Valuation. To the contrary, documents S4 - S8 show Mr Lonergan seeking to not follow the "ATO view", as expressed in Taxation Ruling TR98/3, which he had concerns about. Ultimately, the ATO did accept Mr Lonergan's alternative approach. According to the Commissioner, there is no basis for any suggestion that Mr Lonergan was not entirely independent when he wrote the AVO Valuation: see Commissioner's Submissions at p 16 at [44].

146. The Commissioner submits that whilst it is true that Mr Lonergan is now employed by the Commissioner, and that might raise a question about the independence of any opinion he expresses, that concern simply does not arise here for the following reasons:

  • • Mr Lonergan's opinion as to the value of "mining information" was expressed in the AVO Valuation [a T28] and not in Mr Lonergan's December 2012 Witness Statement.
  • • Mr Lonergan's instructions (in Mr Lonergan's December 2012 Witness Statement, SL2 at [5]) were limited to a review of the MKT Valuation Report and Mr Longworth's Supporting Data and he does not go beyond those instructions.
  • • Mr Lonergan's December 2012 Witness Statement is merely a critique of the MKT Valuation Report and does not express any additional opinion.
  • • The purpose of Mr Lonergan's December 2012 Witness Statement is to provide AP Energy with the Commissioner's views on the problems with the MKT Valuation Report, so that AP Energy could deal with those problems, which it sought to do in Mr Longworth's January 2013 Witness Statement.
  • • The alternative to providing AP Energy with Mr Lonergan's December 2012 Witness Statement in advance of the hearing would have been to cross-examine Mr Longworth on each of the issues raised in it, without any warning nor any opportunity for him to provide a considered response. However, as a matter of fairness to AP Energy and so as to narrow the issues, it was considered more appropriate to provide the critique, by way of Mr Lonergan's December 2012 Witness Statement and enable Mr Longworth the opportunity, which was taken, to respond. This approach directly resulted in the need for only limited cross-examination of Mr Longworth and considerably reduced the hearing time.
  • • The AVO Valuation, not Mr Lonergan's December 2012 Witness Statement, was the basis of the Objection Decision: see Commissioner's Submissions at pp 16-17 at [45].

147. According to the Commissioner, for AP Energy to succeed, the Tribunal must be satisfied that the assessment is excessive. To do that, it must be satisfied that Mr Longworth's preferred valuation of $21,158,707 for "mining information" is reliable as the market value of the mining information at 3 December 2007. This satisfaction must be reached despite:


  • ATC 5921

    • no consideration having been given to market value;
  • • no consideration having been given to the value of Abra as a whole or the mining rights;
  • • the striking inconsistency between Mr Longworth's approach and that of the AVO;
  • • the striking inconsistencies between Mr Longworth's approach in the MKT Valuation Report and the approach taken by Xstract in the BDO Valuation; and
  • • Mr Longworth's lack of demonstrated valuation qualifications and expertise: see Commissioner's Submissions at p 17 at [46].

148. For these reasons, the Commissioner argues, AP Energy's application must fail: see Commissioner's Submissions at p 18 at [47].

Tribunal's view

149. Based on the totality of evidence before it, on balance the Tribunal favors Mr Longworth's valuation of the Abra's "mining information" as at 3 December 2007 of $21,158,707 (as provided in the MKT Valuation) over Mr Lonergan's valuation of Abra's "mining information" as at 3 December 2007 of $10,000,000 and, consequentially, the residual for the "mining rights" of $27,250,703 (as provided in the AVO Valuation). It follows, for the above reasons, that Abra did not pass the PAT in s 855-30 of the ITAA 1997 and AP Energy can disregard its capital gain on the part disposal of its share in Abra (to Hunan) on 3 December 2007. That is, the Tribunal considers, based on all of the evidence before it, that Mr Longworth's valuation of Abra's "mining information" as at 3 December 2007 supports a finding, on the balance of probabilities, that the Assessment is excessive.

150. Mr Longworth was not required by the MKT Brief to do anything other than provide a market value for Abra's "mining information" as at 3 December 2007 (see paragraphs 111 to 113) and that is exactly what he did. Based on the evidence before the Tribunal, Mr Longworth was not briefed by MKT to undertake a valuation of the total value of Abra's assets as at 3 December 2007 for the reason that, as discussed above (in paragraphs 91, 92, 125 and 126), AP Energy accepts the "residual method" used by the AVO in the AVO Valuation to ascertain the market value of each of Abra's assets as at 3 December 2007 and generally accepts the values attributed to Abra's assets (as at 3 December 2007) by the AVO (i.e. as provided in the AVO Valuation) using that method as well as the total market value attributed to Abra by the AVO (as at 3 December 2007) of $42,133,134 - the main exception being the value given by the AVO to Abra's "mining information" (of $10,000,000). For that reason, no valuation of the total value of Abra was undertaken by Mr Longworth.

151. The Tribunal disagrees with the Commissioner's assertion that Mr Longworth lacked the requisite qualifications and expertise to value Abra's "mining information".

152. The Tribunal considers that evidence before it establishes that Mr Longworth possesses the necessary specialized knowledge to perform the task requested of him in the MKT Brief, being to value Abra's "mining information" as at 3 December 2007: refer to paragraphs 108 to 110 and 114 above, noting that Mr Longworth refers to his experience as encompassing "evaluation", which word is a synonym for "valuation". Further, the Tribunal notes that Mr Longworth's expertise, work and conclusions in valuing Abra's mineral asset, "mining information", were not challenged by the Commissioner in its cross-examination of Mr Longworth. Mr Longworth was simply asked, by counsel for the Commissioner, to confirm the steps he had taken in valuing Abra's "mining information": see Transcript at pp 17-26.

153. Having read and considered all of Mr Longworth's evidence (comprising the MKT Valuation, Mr Longworth's Supporting Data, Mr Longworth's September 2012 Witness Statement, Mr Longworth's January 2013 Witness Statement and Mr Longworth's oral evidence), the Tribunal takes the view that the method by which Mr Longworth reached his valuation of Abra's "mining information" as at 3 December 2007 is, contrary to the Commissioner's contentions, on a fair and objective reading, clear and transparent.

154. As submitted by AP Energy, to obtain a fair snapshot of Abra's underlying TARP as at 3 December 2007 for the purposes of the PAT,


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the cost to a prospective arm's length purchaser of regenerating "mining information", discounted for the use of relevant "mining information" publicly available, ought to be divorced from the intangible which may arise from "mining information" and attach to the mining right or real property. The Tribunal considers that this is what Mr Longworth's valuation enables.

155. The Tribunal agrees with AP Energy's contention that Mr Longworth's valuation of Abra's "mining information" as at 3 December 2007 provides a reliable, conservative and independent expert assessment of the replication cost of Abra's "mining information" as at 3 December 2007 and that the residual of Abra's enterprise value picks up all the intangible value attracted to Abra's mining rights or real property by its exploration activity.

156. The Tribunal disagrees with the Commissioner's assertion that Mr Longworth did not properly consider the "market value" of Abra's "mining information" as at 3 December 2007 and that he "ignored the legislation". The Tribunal is of the view, based on the evidence before it, that Mr Longworth provides an expert opinion of the "market value" of the "mining information" component of Abra's mineral asset as at 3 December 2007. That is, Mr Longworth did ascertain a "market value" for Abra's "mining information", the sunk cost methodology being an acceptable proxy for "market value": refer to paragraphs 117, 120, 123 and, in particular, 124, where Mr Longworth states (in Mr Longworth's January 2013 Witness Statement at p11) that "an arm's length transaction of the Mining Information alone would be AUD21.6 M at the Valuation Date". The Tribunal considers that Mr Longworth's approach to valuing Abra's "mining information" as at 3 December 2007 is consistent with the EM and the case law on the meaning of "market value": refer to paragraphs 61 to 66 above.

157. The Tribunal disagrees with the Commissioner's assertion that "There is no basis for the methodology adopted [by Mr Longworth] other than being directed to do so by [AP Energy]": Commissioner's Submissions at p 11 at [36(a)]. The Tribunal is of the view that based on a fair and objective consideration of all of the evidence before it, there is nothing to suggest that Mr Longworth was "directed" as to what method he should use to value Abra's "mining information". Mr Longworth makes it clear that from the outset that he, following discussions with Mr McKibben, selected the cost base valuation methodology: see paragraphs 111 to 114 and 120 above.

158. The Commissioner's Submissions (at [39] to [43]: see paragraphs 139 to 144 above) point to various alleged inconsistencies between Mr Longworth's valuation approach (i.e. in the MKT Valuation Report) and the valuation approach taken by Xstract in the BDO Valuation, both reports having been prepared by Xstract but authored by different people within Xstract. The Tribunal is of the view that it is a pointless exercise to draw comparisons between the two reports since, as contended by AP Energy, they are "not measuring like with like". The BDO Valuation values Abra's mineral asset in its entirety, including mining and prospecting information optimized for the purpose of resource estimation: refer to paragraphs 102 to 104 above. In contrast, in the MKT Valuation Report Mr Longworth is valuing all of Abra's mining and prospecting information, using a method which starts from "the basic premise….is the data does not exist or may never have existed": see paragraph 123 above. That is, Mr Longworth is not valuing Abra's mining and prospecting information optimized for resource estimation.

Application of RCF to valuing Abra's assets

159. RCF is similar to Abra in that:

  • (i) the only material tangible asset of SBM (and Abra) which is TARP is SBM's (and Abra's) "mining rights": see RCF at [110]; and
  • (ii) SBM's (and Abra's) "mining information" and plant and equipment are non-TARP assets: see RCF at [113].

160. However, RCF is different to Abra since:

  • (i) Abra is an explorer : see Ex A3 at pp 2-5 at [3] and p11 at [6]; Ex A1 at p 150ff and p 203ff (being Abra's 2007 financial statements and 2008 annual report

    ATC 5923

    respectively) and Ex R1 at pp i-ii and p 2 at [1.1];
  • (ii) SBM is a producer . In RCF, the Court states (at [14]-[15]):
    • 14. SBM at all relevant times conducted a gold mining enterprise on mining tenements in Australia owned by it, using plant, equipment, mining information and other assets held by it…….
    • 15. At all relevant times, SBM's fully paid ordinary shares had been listed on the Australian Securities Exchange ("ASX"). The key assets of SBM in the year of income were its Southern Cross and Leonora operations, both of which are located in Western Australia. SBM's Southern Cross operations primarily comprised the Marvel Loch underground mine. SBM's Leonora operations primarily comprised the Gwalia underground mine.

161. The Tribunal agrees with the submission made by AP Energy, that this distinction (i.e. that SBM is a producer and Abra is an explorer) has some important ramifications in this case.

162. In the present case, "market capitalisation" is the accepted starting point of both parties to value Abra, based on the listed share price of Abra as at 3 December 2007, with a control premium (of 25%) added. The Tribunal notes that in RCF, Edmonds J (at [116]) did not reject outright the "market capitalization" method as inappropriate but found the DCF method was to be preferred as reliable. As obiter dicta, his Honour's preference in RCF for the DCF method being used to value SBM (a producer) does not, in the Tribunal's opinion, undermine using "market capitalisation" as an acceptable starting point to value Abra (an explorer).

163. Indeed, while the DCF method using the net present values of future cash flows might be suitable for a producer like SBM, the DCF method may be unreliable and inappropriate in assessing the market value of an explorer like Abra, where there is no defined orebody of assessed economic significance: see the BDO Valuation at p 17 (Overall Opinion) and p 36 at [3.5]) which notes in April 2011 that there is no information available to reliably forecast the future cash flow, Mr Longworth's January 2013 Witness Statement, where he states (at p 7 at [1]) that: "…the tenements in question did not host a defined orebody of economic significance as at the assessment date …" and Mr Longworth's comments in the MKT Valuation at p 10 at [6].

164. As set out above, the methodology the Court refers to in RCF (in 156] to [157]) determines a market value for "mining information" by taking a mid point of a bargaining zone between SBM realising nothing by no transaction to the maximum for a hypothetical purchaser of the cost, time delay as well as outlay, of re-creating the mining information. As submitted by AP Energy, sharing "equally between the holder, and the potential user, of the relevant asset the benefit to the user of immediate acquisition of the asset", does not necessarily transfer readily to the situation of an explorer company like Abra where presently the "highest and best use" is not established to be "a business of mining the reserves in mining tenements". That is, in an explorer company like Abra, where the viability of any mining is still unassessed, the value of the "mining information" is in a sale to a buyer who would have to recreate the "mining information" in order to continue exploration to identify an ore body of economic significance. In RCF, the Court had a full valuation of the mining asset of SBM (a producer) where discounted cash flows were available for ongoing feasible mining operations. That is not the case here. Consequently, the Tribunal considers that the approach taken by Edmonds J (at [157]) in RCF to determining the "market value" of "mining information" cannot automatically be said to apply to an explorer, such as Abra.

165. Further, the Tribunal notes Edmond J's acceptance of the expert evidence given by Mr Eshuys whose qualifications and specialised knowledge are not dissimilar to Mr Longworth's. At [84] in RCF, the Court states that:

Mr Eshuys is currently Executive Chairman of Drummond Gold Limited. Between 24 July 2004 and 9 March 2009, he was Managing Director and Chief Executive Officer of SBM. He holds a Bachelor of


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Science majoring in Geology from the University of Tasmania. He is a fellow of the Institute of Mining and Metallurgy (Aus/MM). He has over 40 years experience in the resource industry in Australian and in 1996 was awarded the Geology Society of Australia's Joe Harms Medal for distinction in exploration success and project development.

166. The Court's reasons at [84] to [91], concerning Mr Eshuys' evidence, are apposite in rejecting the Commissioner's submissions about Mr Longworth's expertise and reports. In particular, in RCF (at [84]) Edmonds J makes the following comment regarding Mr Eshuys' evidence:

Having regard to the whole of Mr Eshuys' affidavit evidence…,; his evidence in cross-examination….; and his evidence in re-examination…., I am satisfied that Mr Eshuys has requisite "specialised knowledge based on [his]….study or experience"….regarding the creation of mining information - how long it would take to undertake the drilling and subsequent analysis to acquire it and the costs associated therewith - and, it follows, the recreation of such information….

167. In conclusion, the Tribunal is informed by the Court's decision in RCF as follows:

  • • an appropriate basis for ascertaining "market value" for the purposes of the PAT in s 855-30 of the ITAA 1997 is one which fairly arrives at a value;
  • • the use of "market capitalization" and the "residual method" were not rejected outright by the Court in RCF and provide an acceptable valuation methodology in the present case (Abra being an explorer and not a producer like SBM in RCF);
  • • Mr Longworth is appropriately qualified to assist the Tribunal with his specialized knowledge and experience;
  • • Mr Longworth's valuation of Abra's "mining information" as at 3 December 2007 is consistent with the reasons for judgment in RCF, and is a reliable specialist valuation of the fair "market value" of Abra's "mining information" asset at 3 December 2007;
  • • the sunk cost methodology as adopted by Mr Longworth is acceptable in determining the "market value" of "mining information".
  • • Mr Longworth's valuation as stated the MKT Valuation Report (at pp 9-10) and in his conclusion in Mr Longworth's January 2013 Witness Statement is a fair mid-point market valuation of Abra's "mining information" as at 3 December 2007; and
  • • the residual intangible or "marriage value" of the "specialised assets" - mining information, mining rights and plant and equipment, is not a TARP asset.

DECISION

168. For the above reasons, the Tribunal:

  • (i) finds that AP Energy has discharged its burden of proving, on the balance of probabilities, that the Assessment was excessive; and
  • (ii) sets asides the Objection Decision and substitutes it with the decision that the Objection should be allowed in full.


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