The AAT has decided that only part (not all) of the profits, of a Swiss company, should have been attributed to the Taxpayer, under the CFC provisions (as “tainted sales income”), despite Swiss Co being 100% (indirectly) owned by the Taxpayer and a UK company, under a dual-listing arrangement.
Though this is a decision of the AAT, the presiding member was Deputy President: Justice Logan (of the Federal Court). Also, it will be evident, from what follows, that this was an important case. The AAT attempted to keep the parties to this case anonymous, but even from this summary, it ought be reasonably clear who the parties are.
The relevant facts (and preliminary legal issues) were as follows:
- A Swiss Co was indirectly owned, as to 58%, by the Australian listed Taxpayer and, as to 42%, by a UK listed company: PLC.
- The Taxpayer and PLC operated under a dual-listed company arrangement (DLC Arrangement), which set those 58% and 42% proportions.
- Under that DLC Arrangement, the Taxpayer and PLC carried on a global resources business – which was, effectively, a very large joint venture.
- The DLC Arrangement provided that (amongst other things): (a) those companies had boards of directors comprised of the same individuals; (b) they had a unified senior executive management; and (c) their directors were required, in addition to their other duties, to to have regard to the interests of the holders, of the ordinary shares, in each entity, as if the Taxpayer and PLC were a “single unified economic entity”.
- Swiss Co bought commodities from the wholly owned Australian subsidiaries of both the Taxpayer, and PLC, and made profits on both: Taxpayer Sourced Profits and PLC Sourced Profits.
- The Taxpayer included 58% of Swiss Co’s Taxpayer Sourced Profits in its tax return, as ‘tainted sales income’, under the Australian CFC accruals regime (in Part X of the ITAA36). That regime requires Australian controllers to return certain types of income of a foreign company that they control. It was common ground that this was required, under the combined operation of ss 456, 384(1) and 386 of the ITAA36. [para 7 of the AAT’s reasons]
- However, the Commissioner amended the Taxpayer’s assessments to include 58% of the Swiss Co’s PLC Sourced Profits, on the basis that this too was ‘tainted sales income’ of the Taxpayer (that should also be attributed to the Taxpayer under the CFC accruals regime). This was where the controversy was. The Commissioner contended that 58% of all of Swiss Co’s profits should be attributed as ‘tainted sales income’ and the Taxpayer said that it should only be 58% of the profits that were sourced from its subsidiaries (which plainly were ‘associates’ and thus, those Swiss Co profits, were plainly tainted). [para 7, also]
- The Taxpayer contended that the PLC Sourced Profits were not, for it, ‘tainted sales income’ because Swiss Co was not buying from it’s ‘associates’, when buying from PLS’s Australian Subsidiaries. For the purposes, ‘associate’ was defined in s318(2) of the ITAA36 (which is part of the CFC accruals regime).
- The Commissioner contended that they were ‘associates’ of PLC.
- The Taxpayer contended that this was not so because:
- Swiss Co was not ‘sufficiently influenced’ by PLC and the Taxpayer (for the purposes of s 318(2)(d)(i)(B)); and
- The Taxpayer was not ‘sufficiently influenced’ by PLC (for the purposes of s 318(2)(d)(i)(A)); and
- PLC was not ‘sufficiently influenced’ by the Taxpayer (for the purposes of s 318(2)(e)(i)(A).
‘Sufficiently influenced‘ was further defined, in s318(6)(b) as follows:
(b) a company [the Australian PLS Subsidiaries] is sufficiently influenced by an entity or entities [PLC] 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);
So, this reduced to an assessment of whether any of the Boards of The Taxpayer, PLC or Swiss Co were, in the context of the dual-listed companies arrangement, ‘accustomed … to act in accordance with the … wishes of [each other – where applicable]’.
Not withstanding the requirements of the DLC Agreement, the AAT found that there was not any abrogation of “effective control”, either by the shareholders or the board of directors of the taxpayer and PLC, at any time, through the relevant income years (2006 to 2010), or generally. This was despite them having boards comprising the same individuals, unified senior executive management and an Agreement committing them to manage the different companies as if they were a single entity.
The evidence also showed that Swiss Co’s board acted in the best interests of that company at all times (as obliged to do so by law) and only followed the wishes or directions of the taxpayer or PLC if the board considered that to do so was in Swiss Co’s best interests.
In many ways, the tests of ‘sufficiently influenced’ followed the same kind of ‘rubber stamped’ (or not) tests used to determine whether central management and control is exercised by the Board, for corporate residency purposes (see High Court decisions in Esquire Nominees and Bywater).
Notwithstanding the Deputy President’s eminence and care, intuitively this seems a challenging decision (which he acknowledged). Perhaps the Commissioner has appealed this decision. Having said that, the central part, of this decision, is findings of fact about the independence of the boards. Appeals from the AAT are only available on questions of law.
(MWYS and FCT  AATA 3037, AAT, Logan DP, File No: 2016/4488-92, 22 December 2017.)
[FJM; LTN 41, 1/3/18; Tax Month March 2108]
Study questions (answers available)
- Does this case decide that the Commissioner was wrong to attribute 58% of all of Swiss Co’s profits, to the Taxpayer (as ‘tainted sales income’)?
- Were the Taxpayer and PLC part of a 58% and 42% ‘dual-listed company arrangement’?
- Were Swiss Co’s profits conceptually divided between the profits made on commodities purchased from the Taxpayer’s subsidiaries (Taxpayer Sourced Profits) and on those purchased from PLC’s subsidiaries (PLC Sourced Profits)?
- Had the Taxpayer returned 58% of Swiss Co’s Taxpayer Sourced Profits, as ‘tainted source income’, because they were, for the Taxpayer, plainly sourced from purchases from an ‘associate’ of the controller?
- Did the Commissioner then amend the Taxpayer’s assessments, to include 42% of the PLC Sourced Profits (of Swiss Co)?
- Did the issue, before the AAT, boil down to which of three companies might be ‘sufficiently influenced’ by the others, and so be an associate’ for CFC purposes, under s316 of the ITAA36?
- And did the AAT find that any of these three companies were ‘sufficiently influenced’ in the relevant sense?