1 February 2019
On 29 January 2019, the Full Federal Court decided (by 2:1 majority) that the Australian and UK head entities in the BHP Billiton dual listed companies (DLC) structure “sufficiently influence” each other and are therefore s.318 “associates” (FCT v BHP Billiton Limited  FCAFC 4). The decision reverses an earlier decision of Logan J (sitting as Deputy President of the AAT) in which the taxpayer’s identity was anonymised (MWYS v FCT  AATA 3037) which is discussed in our earlier Riposte.
While the decision (particularly of Thawley J) is based in part on the specific features of the DLC structure – an issue not relevant for most taxpayers – the decision does have broader implications, particularly for stapled groups, which may share some features of DLC arrangements such as common management or board, common economic ownership and mutuality of interest.
Pursuant to s.318(6)(b), a company will be "sufficiently influenced" by another entity if the company (or its directors):
- is accustomed
- is under an obligation (whether formal or informal); or
- might reasonably be expected,
to act in accordance with the directions, instructions or wishes of the other entity.
Importantly, each of the judges (and the parties) accepted that the “acting in accordance with” aspect of the definition imports an element of causation such that sufficient influence will not exist merely because the actions of one entity undertaken independently coincide with the wishes of another. The core of the dispute was the level of causation required.
In the present case, it was accepted by the parties that the head entities in the DLC structure acted (and were obliged by the terms of the DLC arrangements to act) with commonality of purpose, having regard to the interests of the shareholders in both DLC head entities, as if the DLC entities were a single unified economic entity. Essentially, the question was whether acting with a common aim and a mutuality of purpose constitutes sufficient influence, or whether sufficient influence requires the imposition of the will of one of the parties on the operations of the other.
The majority (Allsop CJ and Thawley J) held that there is no requirement of control, or of one party imposing its will on the other, and that the definition of sufficient influence is “wide enough to include circumstances of mutually advantageous decision-making by parties as equals acting in accordance with the direction, instructions and wishes of each other for the common economic goal of operating a single economic entity.” This broad interpretation was based in part on the structure and purpose of the “associate” rules in s.318, in the context of the CFC rules, under which associate relationships can arise without any elements of control, for example any entity that benefits under a trust is an associate of the trustee (s.318(3)(a)).
However, that conclusion should be read in the context of Thawley J’s finding of fact that certain aspects of the DLC voting arrangements (the detail of which is beyond the scope of this note) did in fact give one party the ability to dictate to the other in the event of disagreement. Further, it is not clear whether circumstances of mutually-advantageous decision-making could constitute sufficient influence absent a common economic goal of operating a single economic entity. In that regard, Thawley J draws a distinction between a joint venture in respect of a particular business endeavour and the DLC arrangement which may be seen as in effect a joint venture covering substantially all of the commercial affairs of the relevant entities.
Davies J (dissenting) essentially agreed with Logan J, deciding that “[w]ithout more, to act in concert with a common aim and mutuality of interest is not ‘to act in accordance with the directions, instructions or wishes of [another] entity’” in the relevant sense. In her view, there was no sufficient influence between the DLC head entities.
It is too early to know whether an appeal will be lodged, but given that the matter has been heard by 4 Federal Court judges split 2:2 in their decisions, clarity on the law would certainly be welcome. In the interim, care will need to be taken in determining whether entities with common boards, common economic ownership or mutuality of interest (such as some stapled groups) are associates. However, given the ATO’s recent focus on whether stapled entities “control” each other for the purposes of Division 6C, perhaps some comfort may be taken from the distinction recognised in the judgments between “sufficient influence” and “control”.