RCF a target of the tax man

ONE the biggest and most active investors in Australia’s junior mining sector, Resource Capital Funds, has become embroiled in a dispute with the Australian Tax Office just weeks after the tax man concluded an investigation into its founder.

Assets held by Cayman Islands-registered Resource Capital Fund III LP, including a $28 million stake in Murchison Metals, were frozen in early November on orders granted by the Federal Court after a secret hearing.

The hearings took place just two months after the ATO gave RCF’s West Perth-based co-founder James McClements a clean bill of health following an investigation into his affairs by its High Wealth Individuals Taskforce.

On November 3, the tax office switched its focus from Mr McClements to one of the funds managed by his business, which has offices in West Perth and Denver.

The ATO claims RCF III owes almost $44 million in tax and penalties relating to transactions in 2005-06 and 2007-08, and sought the freezing of assets to ensure the funds were not taken out of the country before its argument could be heard.

The move to freeze the funds follows the ATO’s embarrassment over the shift of hundreds of millions of dollars offshore by private equity player TPG after it sold out of retail player Myer following a turnaround.

Like the entity that invested in Myer, RCF III was registered in a tax haven and the ATO was seeking to have capital gains treated as income for the purposes of tax.

RCF claims it has followed investment rules and hopes to resolve the matter when it returns to court on December 16.

RCF said that, despite the Cayman Islands registration, the fund’s investors were almost exclusively US-based, subject to American tax laws and, regarding Australian investments, the US-Australia Double Taxation Treaty.

“RCF is precisely the style and structure of private equity firm the ATO has since identified as conforming with its rules in the determination released just this week,” RCF US-based general counsel Brian Dolan said in a statement.

Court documents show the ATO’s main target is profits RCF earned from transactions relating to St Barbara Mines – one being the transfer of a royalty right to a Canadian company and another being the sale of 100 million shares. The tax office claims the royalty assignment realised assessable income of nearly $13 million while the share sales amounted to $58 million.

The ATO claims tax of more than $21 million and penalties of almost $16 million are owed. Interest charges bring the total bill to $43.8 million.

RCF’s total investment in Australian companies, through a series of funds, is not known and the fund manager declined to provide any details of either private or listed company holdings.

Court documents show it has stakes of around $5.6 million in each of Cape Alumina and Kasbah Resources. It has nearly $2 million in shares in Alkane Resources.

ASIC records show Mr McClements is a director of Bannerman Resources, Murchison Metals, QMag and Rey Resources, as well as local hedge fund investor NWQ Capital Management.