FC of T v BHP Billiton Ltd

Judges: Allsop CJ

Davies J
Thawley J

Court:
Full Federal Court of Australia

MEDIA NEUTRAL CITATION: [2019] FCAFC 4

Judgment date: 29 January 2019

Davies J

17. I have had the benefit of reading a draft of the reasons for judgment of Thawley J but, for the reasons that follow, I have respectfully differed on the outcome.

18. This appeal concerns the meaning and effect of the phrase " sufficiently influenced " in s 318(2) of the Income Tax Assessment Act 1936 (Cth) ( " ITAA 1936 " ). That phrase is used, relevantly, to denote one of the relationships that will constitute a company an " associate " of another company for the purposes of the controlled foreign corporations provisions in Part X of the ITAA 1936. The term " associate " as used in that Part has the meaning given by s 318. Relevantly, s 318(2) provides that:

For the purposes of this Part, the following are associates of a company (in this subsection called the primary entity ):

  • …
  • (d) another entity (in this paragraph called the controlling entity ) where:
    • (i) the primary entity is sufficiently influenced by:
      • (A) the controlling entity; or
      • (B) the controlling entity and another entity or entities; or
      • …
  • (e) another company (in this paragraph called the controlled company ) where:
    • (i) the controlled company is sufficiently influenced by:
      • (A) the primary entity; or
      • (B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or
      • (C) a company that is an associate of the primary entity because of another application of this paragraph; or
      • (D) 2 or more entities covered by the preceding sub-subparagraphs; or
      • …

19. The phrase " sufficiently influenced " has the meaning given by s 318(6)(b), which provides that for the purposes of the section:

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) …

20. Thus, whether a company is " sufficiently influenced " by an entity or entities within the meaning of s 318(6)(b) requires a factual enquiry into whether " the company, or its directors " :

21. For the income years ended 30 June 2006 to 30 June 2010 inclusive, the Commissioner assessed BHP Billiton Ltd ( " Ltd " ) on income derived by BHP Billiton Marketing AG ( " BMAG " ) from the sale of commodities that BMAG purchased from Australian subsidiaries of BHP Billiton Plc ( " Plc " ) on the basis that Plc was an " associate " of BMAG and the profits constituted " tainted sales income " of BMAG attributable to Ltd under the provisions of Part X of the ITAA 1936. BMAG is a Swiss company and a controlled foreign corporation of Ltd by reason that Ltd indirectly holds 58% of the shares in BMAG. Plc indirectly holds the other 42%. Ltd and Plc have been parties to a dual-listed company arrangement ( " DLC Arrangement " ) since 2001 and, under the terms of the DLC Arrangement, they each carry on a global resource business through their respective subsidiaries. During the income

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years in question, Ltd and Plc both made sales of commodities to BMAG through their wholly owned Australian subsidiaries. Ltd did not dispute that the income that BMAG derived from the sale of the commodities it purchased from Ltd ' s wholly owned Australian subsidiaries was " tainted sales income " of BMAG within the meaning of s 447(1) of the ITAA 1936 to be included in the calculation of the " attributable income " of BMAG on which Ltd is liable to tax under the provisions of Part X. Ltd also did not dispute that the income that BMAG derived from Plc ' s Australian subsidiaries was " tainted sales income " of BMAG attributable to Ltd under the provisions of Part X if Plc ' s wholly owned Australian subsidiaries were " associates " of BMAG within the meaning of s 318. Ltd, however, disputed that Plc ' s wholly owned Australian subsidiaries were " associates " of BMAG within the meaning of s 318.

22. Before the Tribunal, it was common ground that Plc ' s wholly owned Australian subsidiaries were " associates " of BMAG in the income years in question if, within the meaning of s 318(6)(b):

23. The Commissioner relied on the features of the DLC Arrangement between Ltd and Plc to contend that Ltd and Plc were both " sufficiently influenced " by the other within the statutory meaning of that phrase in s 318(6)(b). That contention was not upheld by the Tribunal, which also did not uphold the Commissioner ' s contention that Ltd and Plc as shareholders in BMAG and as parties to the DLC Arrangement together " sufficiently influenced " BMAG for the purposes of s 318(2)(d)(i)(B).

24. The central point of difference between the parties on the construction of the expression " sufficiently influenced " concerns the phrase " to act in accordance with " . The approach of the Tribunal was to look at the case law on the meaning of the phrase " accustomed to act in accordance with the person ' s instructions or wishes " in the definition of " director " in s 9 of the Corporations Act 2001 (Cth) ( " Corporations Act " ) to provide guidance by analogy in relation to the statutory meaning of " sufficiently influenced " . As the Tribunal noted, the language of the Corporations Act definition of " director " is strikingly similar to, and in substantially the same terms as, the counterpart element " are accustomed … to act in accordance with the directions, instructions or wishes of the entity or entities " in the definition of " sufficiently influenced " .

25. The Commissioner accepted that the words " to act in accordance with " in s 318(6)(b) denote a requirement for some causative connection between the act of the primary entity and the directions, instructions or wishes communicated by another entity to constitute the other entity an " associate " of the primary entity, but contended that the Tribunal wrongly applied a " control " or " subservience " test in reliance on the company law cases on the meaning of " director " . The Commissioner argued that s 318(6)(b) is materially broader in its terms than the definition of " director " , fulfilling a different legislative purpose in a different statutory context. The Commissioner contended that Part X is a " major piece of anti-avoidance legislation " and s 318 should be given a broad and substantive construction, and " not be hedged about with unexpressed, implied limitations " . The Commissioner emphasised the broad range of relationships covered by the s 318 definition of " associates " . The Commissioner contended that the kind of causal relationship with which the provision is concerned is not control or subservience but influence and submitted that if the directions, instructions or wishes of another entity are an influence on the company in acting in the sense of being taken into account, there is a sufficient causal nexus. To construe the phrase " to act in accordance with " as requiring the directions, instructions or wishes of another entity to be the cause of the company acting was said to import a requirement of " control " which is not mandated by the language. It was submitted that the directions, instructions or wishes of the other entity neither has to be the cause of the company acting or involve any exercise of control.

26.

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Ltd, on the other hand, argued that the language of the subsection connotes " control " or " subservience " and the Tribunal was correct to attribute a meaning to the words " in accordance with " that is consistent with the company law cases on the construction of the Corporations Act definition of " director " .

27. The language of s 318(6)(b) does bear some similarity with the Corporations Act definition of " director " but case law on that definition does not provide the answer to how s 318(6)(b) should be construed. Section 318(6)(b) must be construed on its own terms and a meaning attributed to the expression " sufficiently influenced " as that expression is employed to define a type of relationship which results in an entity being " an associate " for the purposes of the application of the provisions in Part X of the ITAA 1936. As McHugh J said in
R v Kelly (2004) 218 CLR 216 at [103]:

… the function of a definition is not to enact substantive law. It is to provide aid in construing the statute. Nothing is more likely to defeat the intention of the legislature than to give a definition a narrow, literal meaning and then use that meaning to negate the evident policy or purpose of a substantive enactment. There is, of course, always a question whether the definition is expressly or impliedly excluded. But once it is clear that the definition applies, the better - I think the only proper - course is to read the words of the definition into the substantive enactment and then construe the substantive enactment - in its extended or confined sense - in its context and bearing in mind its purpose and the mischief that it was designed to overcome. To construe the definition before its text has been inserted into the fabric of the substantive enactment invites error as to the meaning of the substantive enactment … [T]he true purpose of an interpretation or definition clause [is that it] shortens, but is part of, the text of the substantive enactment to which it applies.

The definition of " associate " in s 318 is now employed in numerous provisions of the ITAA 1936 and the Income Tax Assessment Act 1997 (Cth) but the substantive enactment relevant to the construction in the present case is the use of that expression within the context of the controlled foreign corporation provisions of Part X for which purpose the definition of " associate " presently applies. Relevantly, amongst other provisions in Part X, the definition of " associate " applies to s 447 pursuant to which, in broad terms, income derived by a controlled foreign corporation from the sale of goods which it purchased from, or sold to, an Australian resident entity that is an " associate " of the controlled foreign corporation is treated as " tainted sales income " and taken into account for the purpose of calculating how much of the attributable income of the controlled foreign corporation is to be included in the assessable income of the controller company.

28. On a textual analysis, the statutory meaning of " sufficiently influenced " contains three elements:

29. The words " accustomed to act " , as a matter of language, denote habitually to act or to act as a matter of regular practice:
Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 at [196]-[197] ( " Buzzle Operations " ). Being " under an obligation to act " is to be obliged or required to act in a particular way. The phrase " might reasonably be expected to act " calls for a prediction based upon evidence. In
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 ( " Peabody " ) the High Court said at 385:

A reasonable expectation requires more than a possibility. It involves a prediction as to

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events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.

The standard of " reasonable expectation " thus requires a cogent or rational basis sufficient to found the expectation that the primary entity would act in a particular way:
K-Generation Pty Ltd v Liquor Licencing Court (2009) 237 CLR 501 at [136]; Peabody at 384-5. The meaning of the words " in accordance with " must be considered in conjunction with each of these phrases as part of a larger composite phrase.

30. Construed in the context of the larger composite phrase, the words " in accordance with " , as a matter of ordinary and grammatical meaning, import a causal connection between the action of the company and the directions, instructions or wishes of another entity that involves more than the company or its directors merely taking account of such directions, instructions or wishes in deciding how to act. Being " accustomed " or " under an obligation " or " might reasonably be expected " " to act in accordance with " the directions, instructions or wishes of another entity affects the understanding of the words " to act in accordance with " as used in this context. In the larger composite phrase, the words " to act in accordance with " carry the sense of, and should be understood to mean, " to act pursuant to " or " give effect to " the directions, instructions or wishes of another entity or " to act in the way " that another entity has directed, instructed or wishes the primary entity to act.

31. It is important to read s 318(6)(b) as a whole and the meaning of the phrase " to act in accordance with " cannot be considered without regard to the preceding words " are accustomed or under an obligation (whether formal or informal), or might reasonably be expected " . Read as a whole, it is reasonably clear, in my view, that the phrase " to act in accordance with " is not just the language of causation in the sense of taking into account. In my view, the causative connection imported in the words " to act in accordance with " involves more than simply taking account of, or having regard to, the direction, instructions or wishes of another entity. In my view what makes an entity an " associate " of a company within the meaning of s 318(6)(b) for the purposes of ss 318(2)(d) and (e) is the requirement or practice of the company (or its directors) to follow, or a reasonable expectation that the company will follow, the directions, instructions or wishes of that entity. In this regard, this construction of s 318(6)(b) has parallels with the construction given to the Corporations Act definition of " director " which Hodgson JA adopted in Buzzle Operations. At [9] his Honour stated:

In my opinion, the statutory formula contemplates the directors being accustomed to act in accordance with the instructions or wishes of a person, in the sense of treating those instructions or wishes as themselves being a sufficient reason so to act, rather than making their own decisions in which those instructions or wishes are merely taken into account as one factor, external to the management of the company, bearing on what is in the best interests of the company.

The words " to act in accordance with " in the context of s 318(6)(b) convey a similar meaning. The causative requirement for the provision to be engaged, denoted by the phrase " to act in accordance with " the directions, instructions or wishes of another entity, may be something less than actual or de facto control which is exercised over that entity but it is not just showing that the directions, instructions or wishes of another entity have " merely " been taken into account in the decision making process.

32. The explanatory memorandum to the Taxation Laws Amendment (Foreign Income) Bill 1990 (Cth) which introduced s 318 is consistent with this analysis. It states:

Paragraph 318(6)(b) clarifies the expression " sufficiently influenced " that is used in [s] 318 in relation to a company. Where any entity or entities have influence, because of obligation or custom, over a company or its directors to direct the actions of the company either directly or through interposed entities, that company will be sufficiently influenced by that entity or those entities.

33. This statement is instructive that the " influence " with which the provision is

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concerned is with respect to the direction of the actions of the company. In the context of the controlled foreign corporation provisions, for which purposes s 318 was enacted, it is not surprising that the definition of " associate " extends to relationships where the primary entity is directed in its actions by another company and thus apply to commercial conduct which can be seen to have the force of a controlling entity, and to bring such relationships within the taxing net. Neither the legislative context nor purpose suggests that a different construction should be preferred. Furthermore, the proposition that Part X is an anti-avoidance measure does not warrant giving the provision a broader meaning than the meaning conveyed by the textual analysis. There is no special rule of construction that applies to anti-avoidance provisions.

34. The Commissioner relied in particular on the following features of the DLC Arrangement to argue that the terms of s 318(6)(b) are enlivened in relation to Ltd and Plc:

35. As the reasons for decision of Thawley J set out these features in detail, I will only refer to them as necessary.

36. The Tribunal ' s conclusion that Ltd and Plc were not " sufficiently influenced " by each other within the statutory meaning of that phrase was based on the findings that:

37. None of those findings were challenged.

38. In my view, the Tribunal addressed the statutory questions posed by s 318(6)(b) on its proper construction. The provision clearly embraces the circumstance where a third party exerts effective control over a company. Plainly, where a company defers to another entity in its decision making or another entity exercises de facto control over the company, the provision will be engaged and the Tribunal correctly considered whether there was an abrogation by Ltd and/or Plc to the other of an effective control. The Tribunal also correctly analysed the facts in terms of whether either company had the ability to dictate to the other party; whether either company acted in subservience to the other, formally or informally, in entering into and implementing the DLC Arrangement; and whether, in acting, each company was pursuing its own interests in the exercise of independent judgment. All of these considerations were relevant to, and probative of, the statutory questions posed by s 318(6)(b). In my view, on the findings made, the Tribunal was correct to hold that the provision was not engaged by reason of the terms of the DLC Arrangement. Whilst there was a mutuality of interest and common aim, as part of which the directors of each company were obliged in the exercise of their powers to take into account the interests of the ordinary shareholders of the other entity " as if the two

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companies were a single unified economic entity " , the finding was that the boards of the respective companies each met and exercised independent judgment and decision making as to their own best interests. Without 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 " within the meaning of s 318(6)(b). On the findings of the Tribunal, neither company under the terms of the DLC Arrangement was directed in its action by the instructions, directions or wishes of the other company, but each was acting independently in its own interests.

39. The special voting arrangements do not compel any different conclusion. The special voting arrangements are set out in detail in the reasons of Thawley J and I only need refer to the key features, which are as follows:

40. The special voting arrangements thus provided a structural mechanism for uniform resolutions by the shareholders of each company. Given that these special voting arrangements formed part of the DLC Arrangement between the companies, I am prepared to accept that the notification by each company to the other of the votes which must be cast by the special voting shareholder to achieve uniform resolutions can be characterised as instructions, directions or wishes given by that company to the other. In that respect, I disagree with the Tribunal, which held that the procedure for Joint Electorate Actions and Class Rights Actions entailed " nothing more than Ltd and Plc informing the special voting shareholders of the number of votes cast for and against a resolution by, materially, their ordinary shareholders " and did not amount to the communication of directions, instructions or wishes by one company to the other.

41. The Tribunal also reasoned that a company is a legal entity separate from its shareholders and that the shareholders of Ltd and Plc in casting their votes at a general meeting exercised a personal right and " had no power even to express a ' wish ' in respect of matters consigned to the board of that company " . That reasoning does not take into account that each company was not only required to notify the other company as well as the other company ' s special voting shareholder of the votes required to carry or defeat a resolution, but was also bound to an arrangement under which the other company ' s special voting shareholder was required to exercise the number of votes as notified. However, for a company to be " sufficiently influenced " within the statutory meaning of that expression, it is also a requirement that, in acting, the company is doing so on or at the direction, instruction or wishes of that entity. In this case, on the findings of the Tribunal, each company, in entering into and implementing the DLC arrangements, which included the special voting arrangements, was pursuing its own interests in the

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exercise of independent judgment. The fact that under the special voting arrangements each company must follow a procedure designed to achieve uniform resolutions at general meetings of the companies is not one company acting " in accordance with " the direction, instruction or wishes of the other company within the meaning of that phrase as used in s 318(6)(b). It is each company giving effect to the contractual terms governing the DLC Arrangement pursuant to which the companies act jointly with a mutuality of interest.

42. The Tribunal was also correct to hold that the dividend arrangements did not cause either company to be an " associate " of the other company by reason of the application of s 318(6)(b). The dividend arrangements are set out in detail in the reasons of Thawley J and included, relevantly, the requirement for each company to declare matching dividends " as far as practicable " (cl 3.1 of the Sharing Agreement). The Tribunal dealt with this at [37]:

The Commissioner also pointed to the mechanism by which Ltd and Plc declared their dividends in support of his contention that they were " associates " . To deal with this it suffices to look by way of example to the practice of Ltd ' s Risk and Audit Committee. That committee resolved to declare a dividend because of an instruction given to it by Ltd ' s board, not by virtue of any direction, instruction or wish, formal or informal, given to it by Plc ' s board. It was in accordance with the direction of Ltd ' s board that this committee noted, on behalf of Ltd, the dividend declared by Plc ' s board. It is evident that there was an administrative practice to record that Plc approved of or agreed with the proposed action. It had no causative effect. It was the direction of Ltd ' s board and that board alone which was not just influential but determinative in relation to the declaring of the dividend.

43. Having regard to the facts as found, there was no error in the Tribunal concluding that s 318(6)(b) did not apply by reason of the dividend arrangements. To the reasoning of the Tribunal I would add the agreement of the companies to act mutually in relation to the declaration of dividends is not " to act in accordance with the direction, instruction or wishes " of the other company within the statutory meaning of " sufficiently influenced " .

44. Accordingly the Tribunal was correct, in my view, to hold that Ltd and Plc were not " sufficiently influenced " by each other within the statutory meaning of that expression.

45. The Tribunal was also correct to hold that BMAG was not " sufficiently influenced " by Plc and Ltd for the purposes of s 318(2)(d)(i)(B). The finding of the Tribunal was that the board of BMAG, when performing its functions, exercised independent judgment about its own best interests and acted accordingly. The Tribunal was correct to observe at [51] that whilst " it is possible, even probable, that BMAG ' s interests regularly coincided with those of Ltd and Plc and that BMAG ' s consequential actions regularly furthered not just its own but also the interests of those companies ' interests " , that did not mean that BMAG ' s board failed to make an independent judgment when making decisions for BMAG. The Commissioner ' s reliance on a Marketing Risk Management Standard does not advance his case any further. The Commissioner argued that this Standard, which applied group-wide to Ltd, Plc and BMAG, demonstrated that BMAG and its directors might reasonably be expected to act in accordance with this policy. First of all, the document is not an expression of " directions, instructions or wishes " by Ltd or Plc as to how BMAG is to act but, even if it be so characterised, the Tribunal found that Group guidelines regarding policies, strategies, and procedures relating to the operation of BMAG, which included the Marketing Risk Management Standard, were considered and approved by BMAG ' s board before being implemented and were capable of being revoked or amended at any time by BMAG ' s board; second, that BMAG ' s board actively evaluated matters and recommendations put to it from BMAG ' s perspective; and third, in some instances, that BMAG ' s board rejected recommendations made to it and requested revised recommendations or for amended resolutions to be put to it for consideration. The adoption of a policy after exercising independent judgment as to whether it should be

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adopted is not to act " in accordance with " the " directions, instructions or wishes " of Ltd and Plc in the relevant statutory sense.

46. In light of this conclusion, the alternative construction argument advanced by Ltd does not need to be addressed. However, I should say something about that construction argument as I do not agree with the Tribunal that s 318(2)(d)(i)(A) and s 318(2)(d)(i)(B) are, as a matter of construction, mutually exclusive provisions so that " [t]o engage one is to exclude the other from application " . The Tribunal reasoned that as s 318(6) is concerned with " control " , s 318(2)(d)(i)(B) cannot apply if s 318(2)(d)(i)(A) already applies " by reason of a single controller already exercising sufficient influence (via s 318(6) control) " . There are two reasons for not agreeing with the Tribunal ' s construction. First, on the construction which I have given to the expression " sufficiently influenced " , an entity may be " sufficiently influenced " by another entity within the statutory meaning of that expression without the entity being under the control of that other entity. Secondly, the fact that s 318(2)(d) uses the disjunctive " or " does not mean, as a matter of construction, that the subsections are mutually exclusive and do not overlap. The disjunctive " or " can also indicate that the provisions are to be read compendiously and, in my view, that is the meaning to be attributed in the context of 318(2)(d) which is not concerned with the legal relationship between the " controlled entity " and the " controlling entity " , but upon the degree of " influence " exercised by one entity over another in respect of its decision making. The requisite degree of " influence " can arise either through the exercise of " influence " by the " controlling entity " singularly (s 318(2)(d)(i)(A)) or the controlling entity and another entity together (s 318(2)(d)(i)(B)). The Tribunal nonetheless was correct in reasoning that for s 318(2)(d)(i)(B) to apply, the directions of both the " controlling entity " and the other entity together would need to cause the " controlled company " to act in a particular way.

47. In view of my conclusions, I would dismiss the appeal.

 

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