"Sufficiently Influenced" - BHP Billiton Limited v Commissioner of Taxation [2020] HCA 5
Thursday 12 March 2020 @ 1.55 p.m. | Taxation
On 11 March 2020, in BHP Billiton Limited v Commissioner of Taxation [2020] HCA 5, the High Court of Australia dismissed an appeal from a decision of the Full Court of the Federal Court of Australia (see Commissioner of Taxation v BHP Billiton Limited [2019] FCAFC 4). The High Court has unanimously held that, under the Income Tax Assessment Act 1936 (Cth) (the Act), income derived by BHP Billiton Marketing AG (BMAG) from the sale of commodities purchased by BMAG from BHP Billiton Plc's (Plc) Australian entities was to be included in the assessable income of BHP Billiton Ltd (the Appellant), because Plc's Australian entities were "associates" of BMAG.
Background
The appeal arises from the assessment of the Appellant, a listed company on the Australian Securities Exchange, for tax by the Commissioner of Taxation (the Respondent) for the income spanning the financial years ended 30 June 2006 to 30 June 2010. The Appellant was at all material times, in an arrangement referred to as a "dual listed company arrangement" (the DLC Arrangement) with Plc, a company listed on the London Stock Exchange. The companies both had the same directors and senior managers and operated as if they were a single economic entity.
The Appellant and Plc indirectly owned the Swiss company BMAG - the split being 58% and 42% respectively and had a special voting arrangement, where votes cast by the ordinary shareholders of the Appellant and separately by Plc on an identical resolution came to be counted mutually. This was effected in each case by a shareholding company which was obliged when casting its votes, to mirror the voting pattern and numbers of the ordinary shareholders of the other company, that is, of the Appellant or Plc. Thus as an example, a resolution that would otherwise pass in respect of the Appellant on the voting of its ordinary shareholders could be defeated as a result of contrary votes cast by the special voting shareholder company, such votes merely mirroring the voting pattern and numbers of Plc’s ordinary shareholders on an identical resolution.
Applicable Law and Cause of Dispute
Under Part X of the Act, BMAG was deemed to be a “controlled foreign company” (CFC) whose income was subject to attribution as income of the Appellant’s for Australian tax purposes.
BMAG made profits on the sale of commodities it had purchased from Australian subsidiaries of the Appellant in the relevant years of income and the Appellant included 58% of such profits in its Australian taxable income as “tainted sales income” under Part X of the Act.
In amended assessments for tax, the Respondent additionally included in the Appellant’s income as tainted sales income, 58% of profits BMAG had made on the sale of commodities it had purchased from Australian subsidiaries of Plc (“the Plc Purchase Profits”). In attributing the Plc Purchase Profits to the Appellant as tainted sales income, the Respondent characterised the relevant Australian subsidiaries of Plc as “associates” of BMAG within the meaning of the Act section 318(2). A view taken by the Respondent that the Appellant was “sufficiently influenced” by Plc, or vice versa, or that BMAG was sufficiently influenced by both the Appellant and Plc. The Respondent relied on the Act section 318(6)(b) which provides that a company is "sufficiently influenced" by an entity if the company or its directors might reasonably be expected to act in accordance with the directions, instructions or wishes of that entity.
Review by the AAT
Following an objection by the Appellant to the amended assessments, which was disallowed by the Respondent, the Appellant sought a review by the Administrative Appeals Tribunal (the AAT) [see MWYS and Commissioner of Taxation (Taxation) [2017] AATA 3037 (22 December 2017)].
On 22 December 2017 the Tribunal (Justice Logan, Deputy President) set aside the Respondents' decision, after finding that BMAG was not accustomed to treating the wishes or directions of Plc or the Appellant, without more, as a sufficient reason for action. The AAT found that the board of BMAG followed the wishes or directions of Plc or the Appellant only if to do so was in the best interests of BMAG.
The AAT also found that in the event of a disagreement neither company could dictate to the other and that the DLC Arrangement did not "abrogate the effective control" of Plc and the Appellant by their respective shareholders and directors.
Full Federal Court Appeal
The Respondent appealed to the Full Court of the Federal Court (Allsop CJ and Thawley J; Davies J dissenting) and the appeal was allowed [see Commissioner of Taxation v BHP Billiton Limited [2019] FCAFC 4]. Allsop CJ and Thawley J found that the Appellant and Plc sufficiently influenced each other, on account of two factors:
- the special voting arrangement, and
- an obligation of the Appellant and Plc to pay matching dividends.
The Federal Court majority found that the AAT had erred by focusing on the powers of directors and on the lack of a relationship of control and subservience. The majority also held that BMAG "was sufficiently influenced" by the Appellant and Plc, its owners, since it was likely to follow the wishes or directions of its owners despite undertaking an assessment of its own best interests in deciding whether to do so.
Justice Davies in the minority, found that the special voting arrangement and the payment of matching dividends were merely incidents of the DLC Arrangement, in the making of which the Appellant and Plc had each pursued its own interests. To act in concert with a mutuality of interest was not to act in accordance with the direction, instruction or wishes of the other within the meaning of the Act section 318(6)(b). Further, her Honour also held that the AAT was correct to hold that BMAG was not sufficiently influenced by the Appellant and Plc, given that BMAG exercised independent judgment and acted in accordance with its own best interests.
Key Grounds for Appeal to the High Court
The key grounds for appeal to the High Court include:
- The Full Court erred in concluding that, despite holding that the words invoke a causal test, a person or entity acts “in accordance with” the directions, instructions or wishes of another entity for the purposes of the Act section 318(6)(b) if the person or entity merely acts “in harmonious correspondence, agreement or conformity with” those directions, instructions or wishes.
- The Full Court should have found that, in order to act “in accordance with” the directions, instructions or wishes of another entity for the purposes of section 318(6)(b), a person or entity must treat that other entity’s directions, instructions or wishes as themselves being a sufficient reason so to act.
The High Court's Decision
The High Court in its unanimous decision found that Plc's Australian entities were "associates" of BMAG, and that "effective control" was not required to establish that a company was "sufficiently influenced" by an entity. The High Court found that the Appellant and Plc "sufficiently influenced" each other because they were required to operate as "combined businesses" and a "single unified economic entity". Further, the Appellant and Plc's shareholding in BMAG, the dual-listing structure, and group level documents that were issued by the Appellant and Plc which applied to BMAG compelled the conclusion that the Appellant and Plc "sufficiently influenced" BMAG for the purposes of the Act.
Comment and Reaction
The case is being regarded as setting an important precedent and clarifying the application of Part X of the Act as the ABC reports:
The ABC has reported that the ATO Deputy Commissioner Rebecca Saint has said that the decision "would have broader relevance to dual listed companies, staples and other similar structures", stating that:
The ABC also quotes a BHP spokesman as stating that the decision provides clarity on the interpretation of a technical area of federal income tax rules:
The spokesman for BHP is further reported as noting, that BHP had contributed about $71 billion in taxes and royalties over the past 10 years and that:
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Sources:
BHP Billiton Limited v Commissioner of Taxation [2020] HCA 5 (11 Mar 2020), Short Particulars and Summaries
Commissioner of Taxation v BHP Billiton Limited [2019] FCAFC 4
MWYS and Commissioner of Taxation (Taxation) [2017] AATA 3037 (22 December 2017)
