Key Income Tax Developments In Australia - February 2019.

Legal News & Analysis - Asia Pacific - Australia - Tax

19 March, 2019


This Bulletin outlines the key Australian income tax developments in the last month affecting your business, including the Full Federal Court decision in Commissioner of Taxation v BHP Billiton Limited [2019] FCAFC 4 on the meaning of "sufficiently influenced". 


Top 5 developments in income tax this month you need to know


Spotlight on Commissioner of Taxation v BHP Billiton Limited[2019] FCAFC 4 The Full Federal Court considered the meaning of the term "associate" in Australia's tax law and in particular, whether one entity is "sufficiently influenced" by another entity. The decision focuses on the meaning of "associate" in Australia's controlled foreign corporation rules but the associate definition is also used in a number of other contexts (such as the thin capitalisation, debt equity, non-resident CGT rules etc). The decision therefore has important implications including for other business relationships outside of a dual listed company structure. 
ATO review on claims of legal professional privilege (LPP)

The ATO has raised concerns around purported LPP claims. The ATO concerns relate to a number of issues including: 

  • whether documents over which a claim for LPP is made satisfy the relevant "dominant purpose test";
  • the involvement of non-lawyer advisors (including situations where it is suggested that the engagements are conducted in all real senses by a non-lawyer with the primary role of a legal practitioner to "rubber stamp" the "deliverable";
  • the role of in-house counsel (including independence issues); and
  • the conduct of LPP review engagements.

The ATO is currently "exploring judicial and legislative options to effectively resolve disputed LPP claims".  Taxpayers seeking to assert LPP in respect of relevant communications should review their protocols and arrangements carefully.

Issues paper released for Initial Coin Offerings

The Australian Treasury has released an issues paper on the regulatory and taxation challenges associated with Initial Coin Offerings (ICOs). ICOs are a form of fundraising in which the issuer creates digital tokens using distributed ledger technology (the same technology that drives crypto currencies such as Bitcoin) and sells them to investors (referred to as "token holders").

The majority of the paper is dedicated to issues surrounding the regulatory classification of ICOs.  However, consideration is also given to the tax implications of ICOs for the issuers and token holders.

For issuers, the paper emphasises that the tax treatment of the proceeds of an ICO will depend on how the arrangement is structured, and the purpose for which the tokens are issued (eg as a debt or equity instrument, as a prepayment for a service, or as a derivative).

For token holders, the paper asserts that tokens acquired through an ICO will be considered an asset for tax purposes, and that any gains arising from the sale of such a token may be subject to CGT or taxed as ordinary income, depending on the purpose of the acquisition.

Finally, the paper notes that where a token does not take the form of a digital currency or a security, GST may apply to the sale. 

 Reportable tax position (RTP) schedule lodgement requirements are changing

 The ATO will no longer issue notifications to all taxpayers who have to lodge an RTP schedule.  If taxpayers meet the following criteria they will need to lodge an RTP schedule for years ending on or after 30 June 2019:

  • they are a public or foreign owned company; and
  • their total business income is $25 million or more in their current tax return; and
  • they are part of a public or foreign owned economic group with total business income of $250 million or more in the current or immediately prior year.

The ATO will still notify other taxpayers if that are required to lodge an RTP schedule.



Spotlight on Commissioner of Taxation v BHP Billiton Limited [2019] FCAFC 4


What you need to know


  • BHP Billiton Plc was found to be an associate of BHP Billiton Limited.  The judgement hinged on the interpretation of the "sufficiently influenced" limb of the definition of "associate" in section 318 of Part X of the Income Tax Assessment Act 1936 (the Act). 
  • The definition of "sufficiently influence" for the purposes of Part X of the Act, is to be given a broad interpretation and does not require "subservience or abdication of responsibility". Therefore, the meaning of "sufficiently influenced" captures relationships between entities which are broader than relationships of control by one over the other.




BHP Billiton Ltd (Ltd) and BHP Billiton Plc (Plc) have formed a dual-listed company arrangement (DLC Arrangement). The decision concerned the application of Australia's controlled foreign corporation (CFC) rules contained in Part X of the Act.  


BHP Billiton Marketing AG (BMAG) is indirectly owned by Ltd (58%) and Plc (42%).  BMAG purchased commodities from both Ltd's and Plc's Australian subsidiaries for on sale at a profit.  The issue before the Court was whether the income derived by BMAG from the sale of commodities it purchased from Plc's Australian entities is "tainted sales income" which would form part of BMAG's attributable income and would be required to be included in the assessable income of Ltd.  This depends on whether Plc's Australian entities were "associates" of BMAG.


The Commissioner argued that Plc's Australian entities were "associates" of BMAG on the grounds that:


  • BMAG was "sufficiently influenced" by Plc and Ltd;
  • Ltd was "sufficiently influenced" by Plc; and 
  • Plc was "sufficiently influenced" by Ltd. 


The relevant influence was said to arise as a result of the DLC Arrangement, which essentially required Ltd and Plc to act as a "single economic arrangement", with common board members and voting and dividend equalisation arrangements.


The parties agreed that if there was sufficient influence in any of these scenarios, BMAG's income relating to commodities purchased from Plc would be tainted sales income and would be included in Ltd's assessable income.


Overview of the provisions


Section 318(2) addresses the instances where an entity is an associate of a company.  Relevantly, the associate of a company includes an entity that "sufficiently influences" the company.  Section 318(6) provides that a company is sufficiently influenced by an entity 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 (whether those directions etc are communicated directly or through interposed entities).


Judgement at first instance


At first instance, Logan J (sitting as Deputy President of the AAT) in finding that an associate relationship did not exist, found that "sufficiently influenced" should be construed in a similar manner to the reference to "shadow directors" in section 9 of the Corporations Act.  Section 9 of the Corporations Act refers to the directors of a company being accustomed to act in accordance with a person's instructions or wishes.  In accordance with judicial interpretation of section 9, Logan J found that "sufficiently influenced" required an abrogation by a party to the DLC Arrangement of "effective control" either by the shareholders or board of the respective entities.  Logan J noted that each of the boards of Ltd, Plc and BMAG met and exercised independent judgment, rather than rubber stamping decisions made elsewhere by others.  Once Ltd and Plc determined to enter into the DLC Arrangement following separate independent decisions by their respect boards:


"...subsequent parallel implementation behaviours and related procuration of subsidiaries become unremarkable and hardly indicative of acting in accordance with the directions, instructions or wishes of another entity. To the contrary, Ltd’s implementation behaviours were in accordance with its own wishes and those of Plc were in accordance with its own wishes. Each chose to act in concert. Neither chose to act in subservience, formal or informal, to the other nor to anyone else."


Judgement of the Full Federal Court (2:1)


Thawley J, with whom Allsop CJ broadly agreed, determined that Plc's Australian subsidiaries were associates of BMAG on the basis that a relationship of sufficient influence arose in each instance proposed by the Commissioner.  Thawley J rejected the analogy to the shadow director provisions noting that those provisions were "noticeably narrower" than the terms of section 318 of the Act.  


In this context, "effective control" or an abrogation of control is not necessary.  Sufficient influence is broader, and can include instances when board members consider the direction or wishes of another entity, even if they only implement it when it is appropriate to do so in the interests of the company of which they are a director.  If a board of directors only consider acting in a particular manner because of an interest expressed by another entity, this may, depending on the circumstances, be sufficient to say the directors were sufficiently influenced within the meaning of section 318(6)(b). 


In particular, Thawley J noted that the contractual arrangements underlying the voting arrangements (which, broadly, allowed for the shareholders in Ltd and Plc to be treated as a single group of shareholders for voting purposes and/or required a majority of shareholders in each company to pass a resolution in certain circumstances) gave rise to the mechanism by which each company communicated its directions, instructions or wishes to the other and required the other party to give effect to such directions, instructions or wishes. The contractual obligation to pay matching dividends also supported this position.
Additionally, Thawley J rejected the taxpayer's argument that PLC was unable to sufficiently influence BMAG given that Ltd sufficiently influenced (and in fact controlled) BMAG by virtue of its 58% shareholding.


Allsop CJ agreed with Thawley J's conclusions and noted that the provision does not require a unidirectional analysis giving rise to a relationship of dominance/subservience.  Allsop CJ considered that the provisions are:


"…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." 


In dissent, Davies J found that there was no relationship of sufficient influence between the relevant parties on the basis that, despite the DLC Arrangement, the boards of each entity met and exercised independent judgement and decision making as to the best interests of the company. In her view, the phrase "in accordance with" in section 318(6) must be read in the context of the preceding words "are accustomed or under an obligation, or might reasonably be expected". This phrase requires that the "controlling entity" needs to cause the "controlled company" to act in a particular way and not only that the relevant directions, instructions or wishes be taken into account in making a decision. Therefore the actions of each entity to act in mutual benefit and with a common aim, did not cause either entity to act "in accordance with the direction, instruction or wishes" of the other entity.


Key implications


In interpreting the meaning of sufficient influence, key conclusions from the majority decision include:


  • Sufficient influence is a lower threshold than control and does not require an abrogation of control.
  • A company can be sufficiently influenced by more than one entity.  Further a company that is controlled by one entity can still be sufficiently influenced by another entity.
  • Sufficient influence can cover situations where parties act as "equals" acting in each other's mutual interests as one economic entity (rather than a situation where an entity has a degree of controlling influence over the other).


While the decision concerns the meaning of associate for the purposes of the CFC rules, the same definition of associate applies in a number of other provisions in the Act.  While the context of each provision needs to be considered carefully, the majority decision is likely to inform the meaning of associate in those other provisions.  


Special leave to appeal to the High Court has been sought.

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For further information, please contact:


Ian Kellock, Partner, Ashurst