On 11 March 2020, in BHP Billiton Limited v Commissioner of Taxation (Commissioner) [2020] HCA, the High Court decided in favour of the Commissioner of Taxation against the appeal of BHP such that dual listed entities were considered “associates” within the controlled foreign company (CFC) rules in Part X of the Income Tax Assessment Act 1936 (ITAA 1936).
The appellant, BHP Billiton Ltd (Ltd), an Australian resident taxpayer, was part of a dual-listed company arrangement (the DLC Arrangement) with BHP Billiton Plc (Plc). BHP Billiton Marketing AG (BMAG) was a Swiss company which, during the relevant years, was a CFC of Ltd because Ltd indirectly held 58 per cent of the shares in BMAG, while Plc indirectly held 42 per cent. BMAG purchased commodities from Ltd's Australian subsidiaries and Plc's Australian entities for sale into the export market. BMAG derived income from those sales.
There was no dispute that BMAG's income from the sale of commodities it purchased from Ltd's Australian subsidiaries was "tainted sales income" to be included in the assessable income of Ltd under Pt X. The dispute was whether income derived by BMAG from the sale of those commodities it purchased from Plc’s Australian entities was “tainted sales income” and included in the calculation of the attributable income of BMAG to be thereby included as part of Ltd’s assessable income.
Under the CFC rules, one company is an "associate" of another for the purposes of Pt X in a number of situations, including where a company is sufficiently influenced by the other entity. Section 318(6)(b) provides that:
"a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts)".
Such income would be included if Plc’s Australian entities were “associates” of BMAG. Both the Commissioner and Ltd agreed that these entities would be “associates” within the meaning of s 318(6)(b) of the ITAA 1936 if:
- BMAG was “sufficiently influenced” by Plc and Ltd; or
- Ltd was “sufficiently influenced” by Plc; or
- Plc was “sufficiently influenced” by Ltd.
Central to the examination of whether Plc and Ltd were “associates” was an examination by the High Court of the DLC Arrangement between the parties.
DLC Structure Sharing Agreement overview
By way of background, when Ltd and Plc merged back in 2001, Ltd and Plc entered into a "DLC Structure Sharing Agreement" whereby they agreed "to establish a dual listed companies structure for the purposes of the future conduct of their combined businesses" and further agreed that "the implementation, management and operation of their combined businesses and affairs shall be undertaken in accordance with the terms" of that agreement and, in particular, the DLC Equalisation Principles and the DLC Structure Principles set out in that agreement.
The "DLC Structure" was defined to mean "the arrangement whereby, inter alia, [Ltd] and [Plc] have a unified management structure and the businesses of both [Ltd] and [Plc] are managed on a unified basis in accordance with the provisions" of the DLC Structure Sharing Agreement. The DLC Structure Principles, which Ltd and Plc agreed were "essential to the implementation, management and operation of the DLC Structure", were set out in cl 2.
First, Ltd and Plc were required to operate "as if they were a single unified economic entity", through common boards of directors. In addition to the common boards, Ltd and Plc were required to operate through "a unified senior executive management".
Second, the common directors of Ltd and Plc, in addition to their duties to the company concerned, were required to have regard to the interests of the holders of ordinary shares in Ltd and Plc "as if the two companies were a single unified economic entity" and, for that purpose, had to "take into account in the exercise of their powers the interests of the shareholders of the other". The Constitution of Ltd and the Articles of Association of Plc expressly allowed the directors of those companies to act in this way. The Constitution of Ltd and the Articles of Association of Plc also provided that the directors of Ltd and Plc did not breach any fiduciary duty by acting in accordance with the various legal documents which set up the DLC Arrangement, including the DLC Structure Sharing Agreement. Thus, Ltd and Plc could choose to do something solely because it was in the interests of the shareholders of the other company.
Third, the DLC Structure Sharing Agreement provided that the "DLC Equalisation Principles must be observed". Those principles, in substance, were designed to ensure that the economic returns and voting rights of the shareholders in Ltd and Plc would be in proportion to the prevailing "Equalisation Ratio" provided for by the DLC Structure Sharing Agreement, which was at the relevant time 1:122.
Fourth, Ltd and Plc agreed to pursue, and to procure (to the extent appropriate to do so) that each member of its respective group (namely Ltd or Plc and its respective subsidiaries from time to time) would pursue, the DLC Structure Principles.
By cl 13 of the DLC Structure Sharing Agreement, Ltd and Plc further agreed that, without limiting cl 2, each would "enter into such further transactions or arrangements, and do such acts and things, as the other may reasonably require from time to time in the furtherance of the common interests" of the shareholders of Ltd and Plc "as a combined group or to give effect to the DLC Structure Sharing Agreement". Furthermore, cl 12 provided that in the event of any conflict between that agreement and either Ltd's Constitution or Plc's Articles of Association, the parties would use their best endeavours to ensure that any required amendment to the Constitution or the Articles of Association was proposed at general meetings of Ltd or Plc (as the case may be) in order to conform one or both to the provisions of the DLC Structure Sharing Agreement.
Two other aspects of the DLC Arrangement, which were consistent with, and necessary for implementation of, the DLC Structure Principles, should be mentioned: dividends and voting.
Clause 3.3 of the DLC Structure Sharing Agreement required Ltd and Plc to pay matching dividends. The procedure in practice was that concurrent board meetings of Ltd and Plc resolved to recommend matching dividends to the "Risk & Audit Committee", which was the delegate of the boards for the purposes of resolving to pay dividends. As part of this process, the Ltd and Plc boards recommended dividend amounts for both their own, and the other, company.
In relation to voting, shareholders of Ltd and Plc were able to affect decisions made by the general meeting of the other entity in relation to "Joint Electorate Actions" and "Class Rights Actions".
In the relevant years, BMAG was 100 per cent indirectly owned by the "single unified economic entity" of Ltd and Plc. BMAG was part of that single unified economic entity. BMAG purchased commodities from Ltd's Australian subsidiaries and Plc's Australian entities for sale into the export market, and maintained a hub in Singapore for, among other things, the marketing and trading of those commodities. And, as further evidence of it being part of that single unified economic entity, Ltd and Plc issued "Group Level Documents" including a "Marketing Risk Management Standard" that applied to BMAG and which set out the governance model and control requirements for managing the commodity price risks and credit risks within BMAG.
How the high court decided
As mentioned earlier, the issue was whether the income derived by BMAG from the sale of commodities it purchased from Plc's Australian entities was also "tainted sales income" to be included in the calculation of the attributable income of BMAG to be included, in turn, in the assessable income of Ltd. For that income to be included, Plc's Australian entities, being the "sellers of goods" to BMAG, had to be "associates" of BMAG within the meaning of s 318(2) of the ITAA 1936.
The definition of associate includes a company which has a majority voting interest in another, but goes further such that one company may be an associate of another if one company is “sufficiently influenced” by the other. The test of sufficient influence looks at whether a company or its directors are accustomed, under an obligation or might reasonably be expected, to act in accordance with the directions, instructions or wishes of another.
Therefore, the High Court focussed its attention whether BMAG was “sufficiently influenced” by Plc and Ltd; or Ltd was “sufficiently influenced” by Plc; or Plc was “sufficiently influenced” by Ltd, under terms of the DLC Structure Sharing Agreement broader arrangements.
The definition of "sufficiently influenced" in s 318(6)(b) comprises a range of activities and influence, where a company (or its directors):
(a) is accustomed (by reference to past action),
(b) is under an obligation (whether formal or informal) (present obligation), or
(c) might reasonably be expected (future action),
to act in accordance with the directions, instructions or wishes of the other entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts). Each of (a) to (c) above is independently sufficient to attract the conclusion that a company or its directors are "sufficiently influenced" by the other entity or entities.
The Hight Court made a critical observation in interpreting the definition of “sufficiently influenced” as outlined in the following paragraph of its decision:
"[38] There is nothing in s 318(6)(b) which specifies how many, or what types of, acts must be "in accordance with the directions, instructions or wishes" of the other entity. The paragraph provides that the act or acts must have been, must be, or must reasonably be expected to be, "in accordance with" the relevant directions, instructions or wishes of the other entity. Whether that is so is a factual inquiry specific to the primary entity and the controlling entity or the directors of those entities. It is a factual inquiry about how and why the company or its directors are accustomed to (past acts), must (present acts), or might reasonably be expected to (future act by reference to some other fact or matter presently existing) act in accordance with the directions, instructions or wishes of the other entity."
In deciding that Ltd and Plc are “associates” of each other, the High Court succinctly summarised the relationship and matter at hand in paragraph 44 as follows:
“[44] In June 2001, the DLC Structure Sharing Agreement, including the DLC Structure Principles, provided that Ltd and Plc, as "combined businesses" and a "single unified economic entity", through common boards of directors and a unified senior executive management, would operate then and in the future in that manner and consistently with the terms of that agreement. For that reason alone, Ltd was "sufficiently influenced" by Plc, as Ltd or its directors "might reasonably be expected ... to act in accordance with the directions, instructions or wishes" of Plc in circumstances where they are operating as "combined businesses" and a "single unified economic entity", with shared senior executive management. Necessarily, the "wishes" of Plc (whether communicated or anticipated) would be taken into account when making decisions for both entities as a "single unified economic entity". Moreover, in the circumstances of this appeal, those matters also provided a basis to conclude that Ltd was "accustomed", and pursuant to the DLC Structure Sharing Agreement and the DLC Structure Principles was "under an obligation", to act in accordance with the "directions, instructions or wishes" of Plc. Indeed, to fail to do so would be contrary to the terms of the DLC Structure Sharing Agreement and the DLC Structure Principles.””
The High Court followed the same reasoning in reverse in relation to Plc being sufficiently influenced by Ltd.
The High Court rejected the taxpayer’s submission that Ltd and Plc operated pursuant to a contract and therefore did not preclude a finding that they “sufficiently influenced” each other. This was on the basis that such a contract would place any company outside of the reach of the statute.
Takeaway
This decision certainly will have broader application to other situations, where the test of “sufficiently influenced” is considered, and potentially stapled arrangements, and taxpayers who are likely to be affected should review their own circumstances.