Mining information and taxable Australian real property

Whether 'taxable Australian real property' in section 855-20 of the Income Tax Assessment Act 1997 (ITAA 1997) includes mining information obtained through exploration expenditure?

No. The mining information is not a capital gains tax asset and as such cannot be 'taxable Australian real property' under section 855-20 of the ITAA 1997.

After 19 September 1985, the taxpayer, a foreign resident, acquired membership interests in Australian resident company A equal to 20% of the total paid-up share capital of Australian resident company A.

Australian resident company A carries on mining operations in Australia, including exploration or prospecting for minerals or quarry materials situated in Australia.

In the course of carrying on its business, Australian resident company A incurred expenditure on exploration activities in Australia which produced mining information. That mining information contributed to the intellectual capital or know-how associated with the company's mining operations.

In 2007-08 income year, the foreign resident disposed of membership interests in Australian resident company A equal to 15% of the total paid-up share capital of Australian resident company A ('the 2008 disposal').

(All legislative references are to the ITAA 1997)

A capital gain or capital loss made by a foreign resident from a CGT event is disregarded under subsection 855-10(1) if the CGT event happens in relation to a CGT asset that is not 'taxable Australian property'.

What constitutes 'taxable Australian property' is set out in section 855-15. A CGT asset that is: (a) an 'indirect Australian real property interest'; and (b) is not covered by item 5 of the table in section 855-15, is 'taxable Australian property' under item 2 of that table.

Subsection 855-25(1) provides that a membership interest is an 'indirect Australian real property interest' when a CGT event happens in relation to the membership interest if the interest passes: • the non-portfolio interest test at that time or throughout a 12 month period beginning no earlier than 24 months before the CGT event happened and ending no later than that time; and • the principal asset test in section 855-30 at that time.

The foreign resident's membership interests in Australian resident company A pass the principal asset test in section 855-30 at the time of the 2008 disposal if the sum of the market values at that time of Australian resident company A's 'taxable Australian real property' exceeds the sum of the market values at that time of its assets that are not 'taxable Australian real property'.

Pursuant to section 855-20, a CGT asset is 'taxable Australian real property' if it is: (a) real property 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.

Therefore, a CGT asset must exist for section 855-20 to apply. Section 108-5 provides that a CGT asset is any kind of property or a legal or equitable right that is not property.

In the present case, Australian resident company A undertook exploration expenditure that produced mining information.

Mining, quarrying or prospecting information is not a CGT asset and so cannot be 'taxable Australian real property' under section 855-20. It is not a CGT asset because it is not property or a legal or equitable right that is not property; it is akin to 'know-how' (see Taxation Ruling TR 1998/3 - Income tax : treatment of receipts for dealing with or disclosing mining, quarrying or prospecting information , particularly paragraphs 4 and 20, and Taxation Determination TD 2000/33 - Income tax : capital gains : is know-how a CGT asset ?).

Further, mining, quarrying or prospecting information is something separate from any mining, quarrying or prospecting right to which paragraph 855-20(b) might apply. Mining, quarrying or prospecting information does not attach to, or form part of, the mining, quarrying or prospecting right (see TR 98/3, particularly paragraphs 27, 28 and 83). Indeed, the separateness of mining, quarrying or prospecting information from a mining, quarrying or prospecting right to which the information relates is reinforced by the recognition under Division 40 of them as separate depreciating assets (see, for example, subsection 40-30(2)).

Consequently, when determining in the present case if the foreign resident's membership interests in Australian resident company A pass the principal asset test in section 855-30 at the time of the 2008 disposal, the market value of the mining information is not included in the sum of the market values at that time of Australian resident company A's assets that are taxable Australian real property.