Australian High Court clarifies definition of “associate” in BHP Billiton tax dispute

By Paul McNab, Tax Controversy Partner, PwC Sydney

On 11 March, a full bench (five Justices) of the High Court of Australia handed down a judgment for the Australian Taxation Office in a matter involving BHP Billiton (BHP Billiton Limited v Commissioner of Taxation [2020] HCA 5).

The dispute involved tax returns for the 2006 to 2020 years and was reported by BHP as involving $USD87m (AUD$125m) in tax for the period 2006 to 2018.

The case turned on the question of whether, under the dual listing structure used by the BPH Billiton group, certain entities were associates, as that term is defined in Australian tax law.

The High Court of Australia is Australia’s highest judicial body, and the Court has a discretion as to whether it accepts appeals in taxation matters. In general, a decision to accept a case indicates the Court sees broad public importance in resolving the questions raised by the parties.

‘Associates’ under Australian tax law

The definition of ‘associates’ is extremely broad and is frequently referenced by other provisions of Australian tax law.  In fact, more than fifty different parts of Australian tax legislation make use of the definition.

The BHP case involved Australia’s controlled foreign corporation rules, but the definition is one that non-Australian groups who operate in Australia would also need to consider in reviewing Australian thin capitalization rules.

Importantly, many multinational groups are currently documenting whether Australia’s diverted profits tax provisions (in Part IVA) apply to their structures and operations. Those provisions also involve consideration of the wide view of the concept of associate approved in the High Court’s judgment.

Importantly, many multinational groups are currently documenting whether Australia’s diverted profits tax provisions (in Part IVA) apply to their structures and operations. Those provisions also involve consideration of the wide view of the concept of associate approved in the High Court’s judgment.

Sufficient influence

The definition of “associate” in Australian tax law is layered.  It includes the more obvious situations where entities are connected by significant shareholdings and legal arrangements which give powers to direct.  But it goes further to include situations where a relationship is shown to involve sufficient influence, rather than legal control. 

Section 318(6)(b) of the Income Tax Assessment Act 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)”.

The Court held that the concept of sufficient influence must be something less than the clear legal control concepts found in earlier parts of the definition.

BHP entities as ‘associates’

The BPH structure was factually complex, with a LTD group (under BHP Billiton LTD) and a PLC group (under BHP Billiton PLC) joined by a DLC structure sharing agreement.  This had provisions that coordinated voting by the shareholders in the two top companies and ensured equivalent dividends.  It imposed obligations on directors to consider the interests of all shareholders.

The Court considered the language of the provision and said that the answer to whether there is sufficient influence will depend entirely on the evidence. 

This must involve a consideration of past or present fact, or future expectations, the Court said. It will be informed by the observed pattern of behavior of the parties, and it is not enough that the boards of each are independent and act in their own interests, especially if the interests of the parties are aligned. 

But it will not be enough that the observed behavior simply coincides with the wishes of the other party, “something more is required” (at paragraph 7 of the judgment). 

The decision then means that taxpayers will need to carefully consider their own circumstances.

Taxpayers taking a position on these and other issues of potential dispute in Australia need to carefully assess the risk of their position against the actual evidence that will be available to the Australian Taxation Office on review.

— Paul McNab is a Tax Controversy Partner at PwC Sydney.


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