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Full Court’s decision on CFC Rules – definition of associates

Full Federal Court’s decision on CFC Rules

Sarah Dunn, Charles Suttie and Jacqueline McGrath discuss the concept of “sufficient influence” within the CFC Rules which was tested in court.

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The Commissioner of Taxation was successful on his appeal to the Full Federal Court that tested the concept of “sufficient influence” within the CFC Rules.

The Full Court was hearing an appeal from an earlier Tribunal decision that found the Swiss-based BHP Billiton Marketing AG (BMAG) – an indirectly held entity of both BHP Billiton Ltd (LTD) and BHP Billiton Plc (PLC) – was not an ‘associate’ of Ltd for the purposes of CFC Rules contained in Part X of the Income Tax Assessment Act 1936 (ITAA 1936).

During the relevant income years, BMAG had purchased commodities from both LTD’s Australian subsidiaries and from PLC’s Australian entities and on-sold them to third parties. 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.

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:

a. BMAG was “sufficiently influenced” by PLC and LTD; or

b. Ltd was “sufficiently influenced” by PLC ; or

c. Plc was “sufficiently influenced” by LTD.

The majority of the Full Court (Allsop CJ and Thawley J) held that PLC’s Australian entities were “associates” of BMAG for the purposes of s 318 of the ITAA 1936 because each relationship identified above was attended with the necessary ‘sufficient influence’.

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