The High Court of Australia on 11 March 2020 issued a decision settling the construction of the phrase “sufficiently influenced.”
The case is: BHP Billiton Limited v. Commissioner of Taxation (Commissioner)  HCA 5 (11 March 2020).
The case concerns members of a corporate group and whether income derived from the sale of commodities by one member (BMAG, an entity in LTD and PLC corporate group) purchased from PLC’s Australian entities would be included in the assessable income of the LTD group. The matter turned upon whether the PLC Australian entities were “associates“ of BMAG for purposes of section 318(2) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
The test in section 318(2) sets out that one company will be an associate of another in a number of circumstances, including when that company is “sufficiently influenced” by the other entity.
The High Court of Australia found that the concept of “sufficient influence” is directed to capturing relationships between entities which extend beyond relationships of effective control by one over the other. There are several important points from the decision, including:
Accordingly, each of the following is independently sufficient to attract the conclusion of “sufficient influence”—
Based on this construction, the High Court held that LTD and PLC group were sufficiently influenced by each other, and therefore were associates of each other, by reason of the operation of their dual-listed company structure sharing agreement. Other aspects of the dual-listing arrangement, including matching dividend and voting arrangements, provided further reasons to conclude the entities sufficiently influenced each other. It was further noted that BMAG was indirectly owned and operated by LTD and PLC as part of a single unified economic entity and it was in that context that BMAG purchased commodities from PLC’s Australian entities. The High Court, therefore, concluded that LTD and PLC also both “sufficiently influenced” BMAG.
There are potentially broader implications from the High Court’s judgment beyond the specific arrangement between the entities in corporate group because the term “associate” is found in approximately 160 sections across the Income Tax Assessment Acts 1936 and 1997 including in regard to the timing of capital losses, the debt-equity rules, thin capitalisation and the timing of research and development (R&D) deductions, among others. Given this decision, tax professionals believe the Australian Taxation Office will revise or update current guidance that involves the concept of sufficient influence.
For more information, contact a KPMG tax professional in Australia:
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