14 Jun 2019
14 June 2019
Ellen Thomas is a corporate tax partner at PwC. She advises on a range of M&A transactions, infrastructure investments and financial arrangements. She is co-Chair of The Tax Institute’s Large Business and International Technical Committee.
The BHP case: What amounts to “sufficient influence”?
There is one particular tax case currently on appeal to the High Court, BHP Billiton Limited (now named BHP Group Limited) v Commissioner of Taxation, that will be significant for all tax practitioners.
The case concerns the definition of “associate” – one of the most widely used terms in the Tax Acts. In particular, the High Court will consider what types of acts amount to “sufficient influence” of a company. This is a complex definition that frequently needs to be examined in practice, including in the application of the thin capitalisation regime set out in Division 820 of the Income Tax Assessment Act 1997 (ITAA97), and the application of the debt-equity rules in Division 974 of the ITAA97.
The majority in the Full Federal Court held that two entities sufficiently influenced each other, and a third entity. As a result, they were all associates (however, it is noted that there was one dissenting judge, and the taxpayer had previously won in the AAT).
The Full Federal Court’s decision arguably lowered the bar for what constitutes “sufficient influence”. We previously understood “sufficient influence” to be about quasi control of a company – that is, an arrangement that has elements of control, but the rights of the controller are not necessarily inherent in the relevant property interest or recorded under a formal agreement. In this regard:
- The language of section 318(2) in relation to companies speaks in terms of control, by referring to the “controlling entity” and the “controlled company”.
- The language regarding sufficient influence is very similar to the shadow director language in the Corporations Act 2001. The case law in relation to shadow directors suggests acting “in accordance” with the directions, instructions or wishes of another requires a degree of control or subservience. Where directors were appointed by an investor, you could trust that if they were acting in the company’s best interests and properly performing their role as director, the sufficient influence test would not be satisfied.
However, as a result of the Full Federal Court decision, it seems that there may be sufficient influence if it is likely that the director would act in accordance with the wishes of an investor (even if this is also the best interests of the company). Further, there is now significant ambiguity as to what types of acts and how many acts may result in sufficient influence. The sufficient influence test may therefore require a deep factual analysis of what has happened in the past and what might be expected to happen in the future.
The High Court case will be keenly watched, in particular to see whether the threshold for what constitutes sufficient influence is re-aligned with the shadow director test, and requires a degree of quasi control of one entity over another. The outcome will shape how numerous provisions of the Tax Acts work – from the application of Division 7A to the public offer test in section 128F. It is hoped that the High Court decision results in an outcome that helps practitioners to apply this complex test. Law change in relation to the definition of “associate” may be necessary if the ATO wins in the High Court.
The Tax Institute has written a summary of the BHP case. The case summary is available in TaxVine 3 (1 February 2019).
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Ellen Thomas, ATI