MWYS and Commissioner of Taxation (Taxation)
[2017] AATA 3037
•22 December 2017
MWYS and Commissioner of Taxation (Taxation) [2017] AATA 3037 (22 December 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2016/4488-92
Re:MWYS
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:The Hon Justice J A Logan RFD, Deputy President
Date:22 December 2017
Date of written reasons: 22 December 2017
Place:Brisbane
The Tribunal’s decision is to:
1.set aside the respondent’s objection decision by which the respondent disallowed the applicant’s objection dated 30 June 2016 to its amended assessments in respect of income tax for the income years ending 30 June 2006 to 30 June 2010 (Relevant Years);
2.in lieu thereof, allow in full the applicant’s objection to those amended assessments; and, consequentially,
3.allow in full the applicant’s objection to penalty assessments in respect of the Relevant Years issued under Div. 284 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA).
The Tribunal notes that it is the respondent’s duty under s 14ZZL of the TAA to make such amendments to assessments as are necessary to implement this decision.
..........................[Sgd]..............................................
The Hon Justice J A Logan RFD, Deputy President
Catchwords
TAXATION – income tax – Controlled Foreign Companies – tainted income – whether taxpayer “sufficiently influenced”– whether taxpayer accustomed to act in accordance with another person’s instructions or wishes – whether so acting “might reasonably be expected” – wish of taxpayer’s board to benefit taxpayer inconsistent with being “sufficiently influenced by another person” – Income Tax Assessment Act 1936 (Cth), Part X, ss 340, 384, 386, 456
Administrative Appeals Tribunal Act 1975 (Cth) s 37
Corporations Act 2001 (Cth) s 9
Income Tax Assessment Act 1936 (Cth) ss 318, 340, 384, 386, 456
Tax Administration Act 1953 (Cth) ss 14ZZE, 14ZZFAustralian Securities Commission v AS Nominees Ltd & Ample Funds Ltd (1995) 62 FCR 504
Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia (2016) 248 FCR 280
BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746
Buzzle Operations Pty Ltd (In liq.) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47
Bywater Investments Ltd v Federal Commissioner of Taxation (2016) 91 ALJR 59
Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62
Commissioner of Taxation v Consolidated Media Holdings (2012) 250 CLR 503
Federal Commissioner of Taxation v Commonwealth Aluminium Corporation (1980) 143 CLR 646
Dairy Containers Ltd v Auditor-General [1995] 2 NZLR 30
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359
Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89
Ho v Akai Pty Ltd (in liquidation) (2006) 247 FCR 205
NEAT Domestic Trading Pty Ltd v AWB Ltd (2003) 216 CLR 277
RCI Pty Ltd v Federal Commissioner of Taxation (2011) 84 ATR 785
Salomon v A Salomon and Co Ltd [1897] AC 22
Secretary of State for Trade and Industry v Deverell [2001] Ch 340
Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1
Secondary Materials - Nil
REASONS FOR DECISION
The Hon Justice J A Logan RFD, Deputy President
22 December 2017
INTRODUCTION
This proceeding concerns the meaning and application, during the 2006 to 2010 income years, of the Controlled Foreign Company (CFC) provisions found in Part X of the Income Tax Assessment Act 1936 (Cth) (ITAA36). In respect of each of these income years, the Commissioner of Taxation (Commissioner) made and issued amended assessments to the applicant.
The applicant’s objection to these amended assessments was disallowed by the Commissioner. That decision is a reviewable objection decision for the purposes of the Taxation Administration Act 1953 (Cth) (TAA). The applicant has sought the review of that decision by the Tribunal.
As was its right under s 14ZZE of the TAA, the applicant requested that the hearing of the review be conducted in private. It was so conducted by me. In consequence, and to the extent practical in the circumstances, I have afforded anonymity to the applicant and also other relevant actors. To name other relevant actors by their corporate names would be subversive of the privacy requested by the applicant. As it is, there are features of the facts which must necessarily be related in order to comply with the statutory obligation to furnish reasons for my decision on the review which limit the extent to which it is practical to afford privacy. In accordance with its usual practice where anonymity is requested, the Tribunal’s registry assigned an alphabetic designator for the applicant in lieu of its corporate name. In these reasons, I have given the applicant the fictional name “Ltd”. I have also adopted (set out below) pseudonyms for other relevant actors and documents. A list of such pseudonyms and a related explanation stating the true name will be published to the parties in conjunction with these reasons.
Background Facts
The background facts, as opposed to the meaning of the CFC provisions and their application to those facts, are not controversial. For the purposes of the review, the parties filed a joint statement of facts and other matters not in dispute (Joint Statement - Exhibit 1), together with a related Joint Tender Bundle of Documents (Exhibit 2). It is appropriate to make findings of fact in accordance with those set out in the Joint Statement. The following recitation of background facts is therefore taken from the Joint Statement but adapted to the end of seeking to afford anonymity. Necessarily also adapted are the definitional abbreviations which were adopted in the Joint Statement. References to “T[numeral]” are references to documents lodged with the Tribunal by the Commissioner pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth), as modified by s 14ZZF of the TAA.
1.Definitions
…
ASX means Australian Securities Exchange.
QGL means QZ Group Limited (a company registered in the UK).
QZ Group has the meaning given in paragraph 6(a).
Q SVC means Q SVC Pty Limited (a company registered in Australia).
QZ Holdings means QZ Holdings Limited (a company registered in the UK).
QMI means QMarketing Investments APS (a company registered in Denmark).
Z SVC means Z SVC Ltd (a company registered in the UK)
QMAG means QZ Marketing AG (a company incorporated in Switzerland).
ZMHBV means Z Marketing Holding BV (a company incorporated in the Netherlands).
Q Munro Pty Co means The Q Munro Proprietary Company Pty Ltd (a company registered in Australia).
Class Rights Action has the meaning given in clause 1.1 of the Sharing Agreement.
DLC Arrangement means the “dual listed company” arrangement to which Ltd and Plc are parties, formed by execution of the documents set out in paragraph 4 (amongst other documents).
JSE means Johannesburg Stock Exchange.
Juris Debenture Trust means Juris Debenture Trust Corporation Plc (a company incorporated in the UK).
Ltd means QZ Limited (a company registered in Australia), which is also the applicant termed “MWYS”.
Ltd Constitution means the Constitution of QZ Limited.
Ltd Group has the meaning given in paragraph 6(a).
Ltd Special Voting Share has the meaning given in paragraph 2(d)(ii).
LSE means London Stock Exchange.
Parties means QZ Ltd and the Commissioner
Plc means QZ Plc (a company incorporated in the UK)
Plc Articles means the Articles of Association of QZ Plc
Plc Group has the meaning given in paragraph 6(a).
Plc Special Voting Share has the meaning given in paragraph 3(c)(iii)
Relevant Documents means each of the documents listed in Schedule 1
Relevant Years means the 2006, 2007, 2008, 2009 and 2010 income years.
Sharing Agreement means the DLC Structure Sharing Agreement between Q Limited and Z Plc dated 29 June 2001.
Special Voting Shares means the Ltd Special Voting Share and the Plc Special Voting Share.
SVS Deed means the SVC Special Voting Shares Deed between Q Limited, QSVC, Z Plc, Z SVC and the Juris Debenture Trust as amended by the SVC Special Voting Shares Amendment Deed dated 13 August 2001.
UK means United Kingdom
Relevant Entities
Ltd and Plc
2.In the Relevant Years, Ltd:
(a)was an Australian public company listed on the ASX;
(b)was a resident of Australia for tax purposes;
(c)was the head company of an Australian income tax consolidated group; and
(d)had:
(i)between 3,300,000,000 and 3,500,000 000 ordinary shares, traded on the ASX and through American depository receipts on the New York Stock Exchange; and
(ii)a single “special voting share” held by Q SVC (Ltd Special Voting Share).[1]
[1] Page 59 of the QZ Annual Report 2008 (T40).
3.In the Relevant Years, Plc:
(a)was a UK publicly listed company with:
(i)ordinary shares admitted to trading on the LSE; and
(ii)a secondary listing on the JSE;
(b)was a resident of the UK for tax purposes; and
(c)had:
(i)between 2,200,000,000 and 2,500,000,000 ordinary shares, traded on the LSE, the JSE and through American depositary receipts on the New York Stock Exchange;
(ii)50,000 cumulative preference shares held by W P Thatcher Plc;[2] and
[2] Note that W P Thatcher Plc was re-registered as W P Thatcher Limited in April 2001
(iii)a single "special voting share" held by Z SVC (Plc Special Voting Share).
4.Since 2001, Ltd and Plc have been parties to a dual-listed company arrangement which was formed by documents including the following:
(a)Ltd Constitution (T52);
(b)Plc Articles (T30);
(c)Sharing Agreement (T9);
(d)DLC Merger Implementation Agreement dated 9 March 2001 (T4);
(e)SVS Deed (T16);
(f)Q Ltd Deed Poll Guarantee dated 29 June 2001 (T7); and
(g)Z Plc Deed Poll Guarantee dated 29 June 2001 (T8).
5.As parties to the DLC Arrangement, Ltd and Plc maintain (and have always maintained) separate:
(a)stock exchange listings; and
(b)tax residences.
6. In the Relevant Years, Ltd and Plc:
(a)had a number of directly and indirectly owned subsidiaries, comprising the Ltd Group and the Plc Group respectively and together known as the QZ Group; and
(b)through their respective subsidiaries, and under the terms of the DLC Arrangement, each carried on a global resource business.
7In the Relevant Years, no Plc Group entity (including Plc) held any shares in any Ltd Group entity (including Ltd), except for ZMHBV (see paragraphs 12-15).
8In the Relevant Years, with two exceptions,[3] no Ltd Group entity (including Ltd) held any shares in any Plc Group entity (including Plc).
[3] In the Relevant Years, QZ Emerald Inc., which is a member of the Ltd Group, held Class A non-voting common shares and Class B non-voting common shares In Z Metals Canada Inc (which was amalgamated with P Allen Limited on 1 July 2008), which is a member of the Plc Group. Additionally, during 2006-7, Ltd held a number of ordinary shares in Plc. (being less than 5% of Plc's ordinary shares) to facilitate a buy-back arrangement n Plc. All of these shares were cancelled in 2007.
Q SVC, Z SVC and the Special Voting Shares
9In the Relevant Years, Q SVC (being the holder of the Ltd Special Voting Share) was:
(a)a resident of Australia for tax purposes; and
(b)wholly owned by the Juris Debenture Trust.[4]
[4] Recital C of the SVS Deed (T16); Page 59 of the QZ Annual Report 2008 (T40)
10In the Relevant Years, Z SVC (being the holder of the Plc Special Voting Share) was:
(a)a resident of the UK for tax purposes; and
(b)wholly owned by the Juris Debenture Trust.[5]
[5] Recital C of the SVS Deed (T16); Page 59 of the QZ Annual Report 2008 (T40)
QMAG
11QMAG was incorporated on 6 September 1991 under the laws of Switzerland.[6]
[6] Notes to the Financial Statements of QMAG 2007-2008 (T37), page 5.
12 Prior to the formation of the DLC Arrangement:
(a)QMAG was a wholly owned subsidiary of ZMHBV; and
(b)ZMHBV was indirectly wholly owned by Plc.
13In October 2001, as part of the formation of the DLC Arrangement, QMI, which is indirectly wholly owned by Ltd, acquired a 58% interest in ZMHBV.
14 Since October 2001, and in the Relevant Years:
(a)ZMHBV owned 100% of the share capital in QMAG;
(b)QMI owned 58% of the share capital in ZMHBV. QZ Holdings owned 42% of the share capital in ZMHBV;
(c)Q Munro Pty Co owned 100% of the share capital in QMI;
(d)Ltd owned 100% of the share capital in Q Munro Pty Co;
(e)QGL indirectly owned 100% of the share capital in QZ Holdings; and
(f)Plc owned 100% of the share capital in QGL.
15By virtue of the shareholdings described in paragraph 14, in the Relevant Years:
(a)Ltd indirectly had a 58% shareholding in QMAG; and
(b)Plc indirectly had a 42% shareholding in QMAG.
16 In the Relevant Years, QMAG (amongst other things):
(a)carried on a business of marketing and trading products and derivatives of all kinds, including those relating to raw materials, metal and energy;[7]
[7] Article 2 of the Articles of Incorporation of QMAG (T23).
(b)purchased certain commodities from production companies worldwide including from those within the Ltd Group and Plc Group for sale into the export market; and
(c)maintained a registered branch in Singapore, the principal activities of which related to the marketing and trading of commodities and the provision of services.
The DLC Arrangement
17 Under the DLC Arrangement, special rules apply where:
(a)the directors of Ltd or Plc consider, in their reasonable opinion, that Ltd or Plc (as applicable) is or is likely to become insolvent.[8] To date, this has never occurred; and
[8] Clause 8.1 of the Sharing Agreement (T9), rule 142 of the Ltd Constitution (T52) and Plc Articles (T30).
(b)a person acquires more than 30% of the ordinary shares in Plc, or more than 20% of the ordinary shares in Ltd.[9] To date, this has never occurred.
[9] Rule 148 of the Ltd Constitution (T52) and Plc Articles (T30).
18 During the Relevant Years:
(a)the votes cast by the Special Voting Shares never caused a resolution of Ltd or Plc to be passed in circumstances where the resolution would not otherwise have been passed solely on the vote of Ltd's or Plc's ordinary shareholders (as applicable);
(b)the votes cast by the Special Voting Shares never caused a resolution of Ltd or Plc to fail in circumstances where the resolution would not otherwise have failed, solely on the vote of Ltd’s or Plc’s ordinary shareholders (as applicable); and
(c)no resolutions on Class Rights Actions were proposed, or put to a vote at a general meeting of Ltd or Plc.
19 The Special Voting Shares to date have never been transferred.
PART D - RELEVANT DOCUMENTS
20 In the Relevant Years, the terms of each Relevant Document were:
(a)as set out in the versions contained in Schedule 1 [to the joint statement (but not reproduced in these reasons)];
(b)alternatively, not materially different from the terms set out in the versions contained in Schedule 1.
21In the Relevant Years, the relevant parties acted consistently with the terms of the Relevant Documents.
PART E - OTHER MATTERS
22 The parties agree that:
(a)if the Tribunal finds that, during the Relevant Years, Plc's wholly-owned Australian subsidiaries which made sales of commodities to QMAG were "associates" of QMAG within the meaning of s 318 of the [ITAA1936]; the
(b)during the Relevant Years, Plc's wholly-owned Australian subsidiaries which made sales of commodities to Lukancor AG were “associates” of Lukancor AG within the meaning of s 318 of the [ITAA1936].
23 The parties agree that:
(a)if the Tribunal finds that, during the Relevant Years, Plc's wholly-owned Australian subsidiaries which made sales of commodities to QMAG were not “associates” of QMAG within the meaning of s 318 of the [ITAA1936] then
(b)during the Relevant Years, Plc's wholly-owned Australian subsidiaries which made sales of commodities to Lukancor AG were not “associates” of Lukancor AG within the meaning of s 318 of the [ITAA1936].
These then are the relevant entities and arrangements inter se.
Against this background the issue in the review proceeding is whether the applicant can prove that the amended assessments are excessive.
The effect of the amended assessments is to attribute profits derived by QMAG to Ltd under the CFC provisions. The assessing rationale for this attribution is as follows. QMAG is a CFC of Ltd for the purposes of Part X (s 340) of the ITAA1936. Pursuant to the combined operation of ss 456, 384(1) and 386 of the ITAA1936, “tainted sales income” falls for inclusion in Ltd’s assessable income. In the Relevant Years, QMAG made profits on the sale of commodities it purchased:
(a)from Ltd’s indirectly wholly owned Australian subsidiaries (Ltd purchase profits); and
(b)from Plc’s indirectly wholly owned Australian subsidiaries (Plc purchase profits).
It is not controversial that QMAG made both the Ltd purchase profits and the Plc purchase profits. Of these, Ltd included in its Australian taxable income 58% of the Ltd purchase profits as “tainted sales income”. There is no controversy about this inclusion. However, the amended assessments include 58% of the Plc purchase profits in Ltd’s taxable income as “tainted sales income”. This inclusion is controversial and the subject of objection.
Ltd contends that the inclusion as “tainted sales income” of 58% of the Plc purchase profits was not authorised because, contrary to the assessing rationale, Plc’s indirectly wholly-owned Australian subsidiaries which made the sales of commodities to QMAG were not “associates” of QMAG for the purposes of s 318 of the ITAA1936. The conclusion that they were “associates” was said by the Commissioner to follow from the application of the “sufficiently influenced” test in s 318 of the ITAA1936.
As to who are “associates” of a company, s 318(2), materially provides:
(2)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
(ii) a majority voting interest in the primary entity is held by:
(A) the controlling entity; or
(B)the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3);
(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
(ii)a majority voting interest in the controlled company is held by:
(A)the primary entity; or
(B)the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or
(C)the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection;
(f)any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).
The meaning of the phrase, “sufficiently influenced” is supplied by s 318(6)(b) of the ITAA1936:
(b)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);
It is plain enough, on the face of the definition of “sufficiently influenced”, that a person may be a “controlling entity” even though it has no formal control over a “primary entity”.
Ltd submits that:
(a)QMAG was not sufficiently influenced by Plc and Ltd for the purposes of s 318(2)(d)(i)(B);
(b)Ltd was not sufficiently influenced by Plc for the purposes of s 318(2)(d)(i)(A);
(c)Plc was not sufficiently influenced by Ltd for the purposes of s 318(2)(e)(i)(A).
The meaning to afford the definition of “sufficiently influenced” must both begin and end with the text of that definition, read in context: Commissioner of Taxation v Consolidated Media Holdings.[10] Context for this purpose may include legislative history and extrinsic materials such as explanatory memoranda but these are not substitutes for the text. Reference was made in submissions to a number of explanatory memoranda but I have not derived any assistance from any of them.
[10] (2012) 250 CLR 503 at [39].
Referring to the express reference in s 318 to partnerships, Ltd contended that the section was inapplicable to joint ventures or to other circumstances in which two persons acted together to achieve common aims. But if, truly, the text of the s 318(6)(b) definition of “sufficiently interested” is cast in a way which embraces in particular circumstances relationships short of partnership it must be given effect. Equally, if a particular relationship falls outside the embrace of that definition, it matters not that, in the absence of that definition, one might, intuitively, consider that the terms of the DLC Arrangement necessarily made Ltd and Plc “associates” within the ordinary English meaning of that word. A priori assumptions must be eschewed when construing the definitions of “associate” and, in turn, “sufficiently interested”.
The Commissioner does not contend that Ltd and Plc were partners during the Relevant Years. Given this and having regard to the definition of “sufficiently interested”, whether the amended assessments are excessive depends on whether:
(a)the board of directors of QMAG was in fact accustomed to act, or might reasonably be expected to have acted, “in accordance with” the directions, instructions or wishes of persons other than members of that board namely, Plc and Ltd; or
(b)the board of directors of Ltd or Plc (or each) was under an obligation to act, or might reasonably be expected to have acted, “in accordance with” the directions, instructions or wishes of persons other than members of the board concerned namely, the other.
As a matter of first impression, the DLC Arrangement strikes me as a paradigm example of one which creates each of these definitionally derived, “in accordance with” relationships. The correctness of that impression is, however, at least challenged by the applicant’s elegantly constructed submissions. Before considering the merits of these, it is first necessary for some facts additional to the above background facts to be set out.
It is not controversial that, in the Relevant Years and under the DLC Arrangement, each of Ltd and Plc:
(a)had boards of directors comprised of the same individuals;
(b)had a unified senior executive management;[11]
(c)required their directors, in addition to their duties to the company concerned, to have regard to the interests of the holders of the ordinary shares in each entity as if Ltd and Plc were a “single unified economic entity”;[12]
(d)were required to pursue, and to procure (to the extent appropriate to do so) that each member of its respective Group pursued, the DLC Structure Principles and DLC Equalisation Principles;[13]
(e)held general meetings on dates as close together as was practicable (Parallel General Meetings); [14] and
(f)guaranteed certain obligations of the other entity.[15]
[11] Clause 2(a) of the Sharing Agreement.
[12] Clause 2(b) of the Sharing Agreement; rule 104(2) of the Ltd Constitution and Plc Articles.
[13] Clause 2 of the Sharing Agreement.
[14] Clause 6.1 (b) of the Sharing Agreement; rule 2(1) of the Ltd Constitution and Plc Articles (definition of Parallel General Meeting).
[15] Ltd Deed Poll Guarantee and Plc Deed Poll Guarantee.
Two main types of resolution may be proposed at general meetings of Ltd and Plc under the DLC Arrangement:
(a)resolutions on Class Rights Actions; and
(b)resolutions on Joint Electorate Actions .
What constitutes these two “actions” is prescribed by the Ltd Constitution, Plc Articles and the Sharing Agreement respectively.[16] Each type of resolution:
(a)must be put to shareholders at Parallel General Meetings of Ltd and Plc;[17] and
(b)give specified voting rights to the holders of the Special Voting Shares[18] (the votes of which must be cast in the manner prescribed in the SVS Deed and the Sharing Agreement) .[19]
In general, the effect of the Special Voting Shares, and the “Specified Number” of votes they carry on resolutions, is that the votes of each of the groups of shareholders may affect whether resolutions are carried or not carried.
[16] Rule 59(1) of the Ltd Constitution and Plc Articles; clause 4.1 of the Sharing Agreement.
[17] Rules 59(3) and 60(2) of the Ltd Constitution and Plc Articles.
[18] Rule 62 of the Ltd Constitution and Plc Articles.
[19] Clauses 2 and 4 of the SVS Deed; clause 4.3 of the Sharing Agreement.
The Commissioner’s position is that the features of the DLC Agreement described in the preceding paragraphs support an inference that Ltd is obliged, or might reasonably be expected, to act in accordance with Plc’s directions, instructions or wishes (and vice versa). It was these features and the ordinary English meaning of the word “associate” which engendered my first impression that the effect of the definitions was to make Ltd and Plc “associates” one of the other.
Not so submitted Ltd. It submitted that the principal purpose of the DLC Arrangement was to provide a charter for economic arrangements at the level of the two listed companies (Ltd and Plc) and their respective public shareholders. Its submission was that the legal structures which underpinned the DLC Arrangement (including the particular features referred to in the preceding paragraphs) were “designed to facilitate operation and management of the businesses of Ltd and Plc on an economically uniform basis and, relatedly, to achieve equivalent economic returns for their respective groups of shareholders”. That the DLC Arrangement had this principal purpose may be accepted but that does not, of itself, mean that Ltd and Plc were not “associates” as defined. If the text of the relevant definitions embraced the terms and implementation of that arrangement, it would be nothing to the point that the principal purpose of that arrangement was economic.
Ltd did not though just rely on this asserted principal purpose. Rather, that formed the backdrop for a much closer analysis by it of the terms and implementation of that arrangement. At the heart of this analysis was the proposition that none of the statutory tests for “sufficiently influenced” was engaged by circumstances in which two or more persons, here Ltd, Plc and QMAG, in the exercise of an independent value judgment of their respective governing boards, each determine that is in the individual interests of each person to act in parallel and to procure subordinate entities to conform with such a decision. What would follow from this is that my first impression and the Commissioner’s assessing rationale in effect confused effect with cause. It is here that Ltd’s asserted principal purpose would become relevant as explanatory of why the independent value judgment was made by each. The effect might be no different to acting “in accordance with” the wishes of another but the cause would be very different.
Ltd developed its submissions as to the meaning of acting “in accordance with” by reference to a number of company law “shadow director” cases. The following, material excerpt from the definition of “director” found in s 9 of the Corporations Act 2001 (Cth) (Corporations Act) explains why resort was made to such cases:
“director” of a company or other body means:
…
(c)unless the contrary intention appears, a person who is not validly appointed as a director if:
(i) they act in the position of a director; or
(ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.
Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors or the company or body.
[Emphasis added]
That part of the definition found in sub-paragraph (c)(i) has a lengthy provenance in company law. Error can, of course, lie in analogy. Even identical words or phrases used in a different context can have a completely different meaning. Nonetheless, both in language and also evident purpose, the use in the Corporations Act definition of director of “accustomed to act in accordance with the person's instructions or wishes” is not only strikingly similar to language used in the ITAA1936 definition of “sufficiently influenced” but is also used in a similar context. That context entails an extension of application of the provision concerned based on an identification of what might be described as “the power behind the boardroom throne”.
Ltd contrasted the terms and implementation of the DLC Arrangement with the circumstances in Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290, where a predecessor of the present s 9, Corporations Act definition fell for consideration. Based on the extended reach of that definition, Hodgson J concluded that a company, Pioneer was a director of Giant. In that case, His Honour accepted (at 327) that the mere ability of a holding company to dictate the composition of the boards of directors of subsidiaries did not render it, definitionally, a director of those subsidiaries. In the case of Pioneer and Giant, what was decisive was a finding (at 374) on the evidence that the board of Giant was accustomed to act in accordance with the instructions or wishes of Pioneer. On the evidence in that case, Pioneer made the policy decisions for Giant and exercised control over its management and financial affairs.
Not all aspects of the reasons of Hodgson J in Standard Chartered Bank v Antico have met with later approval (a subject unnecessary to explore in detail). What is presently relevant is that his Honour’s conclusion that a body corporate could be a shadow director was accepted as correct by the Full Court of the Federal Court in Ho v Akai Pty Ltd (in liquidation) (2006) 247 FCR 205 at 210. In my view, that acceptance necessarily carried with it approval of the reasoning of Hodgson J which led to that conclusion. Notably for present purposes, it was also accepted in Ho v Akai Pty Ltd (in liquidation) (at 311) that, definitionally, a person might be a “shadow director” even though that person’s influence or control was only strategic in character, “defining the context in which, or conditions upon which, the company operates, or else contriving the transactions of significance to the company”.
There is no provision in the DLC Arrangement for the giving, one to the other, of any formal directions or instructions. However, in relation to shadow directors, it is unnecessary to demonstrate that formal directions or instructions were given: Australian Securities Commission v AS Nominees Ltd & Ample Funds Ltd (1995) 62 FCR 504, only that the directions or instructions are identifiable: Dairy Containers Ltd v Auditor-General [1995] 2 NZLR 30. In my view, the same must follow by analogy in relation to the definition of “sufficiently influenced” in s 318. So the absence of formal directions or instructions, while relevant, is hardly conclusive of an absence of “sufficiently influenced”.
The shadow director cases also offer, in my view, guidance by analogy in relation to the meaning of “accustomed to act”. The phrase imports habitual compliance as evidenced by a pattern of behaviour over a period of time: see, notably, Buzzle Operations Pty Ltd (In Liq.) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 at [196] and [198] per Young JA, Hodgson JA (at [8] and Whealy JA (at [286]) agreeing. These cases confirm a meaning which one might in any event afford the phrase as a matter of ordinary English.
Ltd’s submissions recognised that informality of direction or instruction, if identifiable from surrounding circumstances, would be sufficient. It drew attention to the following, which I find were features of the DLC Arrangement and its implementation in the Relevant Years:
(a)pursuant to the Ltd Constitution, the management and control of the business and affairs of Ltd was, in the Relevant Years, vested in the Ltd Board, which was authorised to exercise all powers of Ltd, except powers required by the Ltd Constitution or the law to be exercised by Ltd in a general meeting;[20]
(b)pursuant to the Plc Articles, the management and control of the business and affairs of Plc was, in the Relevant Years, vested in the Plc Board, which was authorised to exercise all powers of Plc, except powers required by the Plc Constitution or the law to be exercised by Plc in a general meeting;[21]
(c)equivalent provisions exist in the case of QMAG vesting executive power in its board;
(d)the parties acted consistently with the terms of the Relevant Documents, including:
(ii)the Constitution of Ltd;
(iii)the Articles of Association of Plc; and
(iv)the QMAG Articles of Incorporation.
[20] Rule 103 of the Ltd Constitution.
[21] Rule 103 of the Plc Articles.
Neither in law nor, I find, in fact, was there in the Relevant Years any abrogation by any party to the DLC Arrangement of an "effective control" either by the shareholders or the board of directors of the respective corporate parties of either the company concerned or its subsidiaries. The boards of Ltd, Plc and, for that matter, QMAG each met and exercised independent judgments rather than “rubber-stamping decisions actually made elsewhere by others”: Bywater Investments Ltd v Federal Commissioner of Taxation (2016) 91 ALJR 59 at [80]. They observed the “central duty” of a board of directors of a company under Australian and United Kingdom company law, which is “to observe its constitution and to pursue the interests of the company as expressed in that document”: NEAT Domestic Trading Pty Ltd v AWB Ltd (2003) 216 CLR 277 at [47] per McHugh, Hayne and Callinan JJ. It was not incompatible with the constitutions of Ltd and Plc for the boards of each of those companies, in the exercise of their respective, separate deliberate judgment in relation to the best interests of each respective company, to cause that company to enter into and implement the DLC Arrangement. It was no part of that arrangement that either surrendered control of its respective subsidiaries to the other or to any third party. These respective judgments having been made, it was and is unremarkable that their respective subsidiaries pursued the interests of their respective parents, including by the furtherance of the DLC Arrangement. There is nothing in the material which would suggest that, in so doing, the subsidiaries’ interests were incompatible with doing this. Rather, the situation which prevailed throughout the Relevant Years was that the interests of the respective subsidiaries coincided with the interests of their respective parents, be that Ltd or, as the case may be, Plc and, in turn, the interests of Ltd and Plc coincided.
As to Ltd, its entry into the DLC Arrangement required the approval of Australia’s Foreign Investment Review Board. That approval was given in 2001 on terms, materially, that it continue to manage and control its subsidiaries.[22] Ltd continued to do this in the Relevant Years.
[22] Treasurer's Press Release: Foreign Investment Approval of [Ltd and Plc] Merger: Conditions under Section 25(1A) of the Foreign Acquisitions and Takeovers Act 1975 (Cth).
Ltd submitted that the DLC Arrangement in substance provided for “a very large joint venture” between it and Plc. So it does. It does, as Ltd submitted, answer the description given by Mason, Brennan and Deane JJ in United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10 of an “association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit”. But whether it is so characterised is not determinative of the inapplicability of the definition of “sufficiently influenced”. That conclusion depends on the meaning to afford that definition and whether it applies to the terms and implementation of the DLC Arrangement. That arrangement has a common purpose or object; namely, the pursuit of the DLC Structure Principles and DLC Equalisation Principles[23] and, in particular, to “operate as if [the two entities] were a single unified economic entity”.
[23] As set out in Clauses 2 and 3 of the Sharing Agreement.
Once it is accepted, and I do accept, that each of Ltd and Plc, by the separate, independent judgments of their respective boards, determined that it was in its best interests to enter into the DLC Arrangement, 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, QMAG included.
This point was, I consider, well made by Ltd in its submission that, under the DLC Arrangement, actions by Ltd and Plc follow a decision of their respective boards (or their delegates) or a vote of their respective shareholders. That is so. It is also the case that the parties may take what are termed Matching Actions in certain circumstances.[24] Ltd submitted that in none of these scenarios could be it said that an action taken (or not taken) by Ltd or Plc reflected or resulted from the directions, instructions or wishes of the other entity, as required by s 318(6)(b). I agree. In law and in fact Ltd and Plc were, throughout the Relevant Period, equals. It is just that, for the purposes of the DLC Arrangement, each had agreed to act jointly for common economic aims via a “single unified economic entity” principle. As Ltd correctly submitted, the DLC Arrangement and its implementation manifests a “collective wish”, not the imposition by one of its wishes on the other. Neither in law nor in fact did one control, formally or informally, the other in the Relevant Period.
[24] Clause 3.1(b) of the Sharing Agreement.
During the Relevant Years, the Ltd and Plc boards were comprised of the same individuals. But those individuals acted in a separate capacity as directors of Ltd on the one hand and of Plc on the other. Perhaps counter-intuitively and contrary to the Commissioner’s assessing rationale, this duality of role is not indicative of the application of the “sufficiently influenced” definition. The reason for this is supplied by adapting a reason given by Thomas J in Dairy Containers Ltd v Auditor-General [1995] 2 NZLR 30 at 91 for why it was that such duality of directorship did not constitute acting in accordance with the wishes of another. The directors of Ltd would need to give themselves directions or instructions in their capacity as directors of Plc (and vice versa). His Honour added, pertinently also for present purposes: “The artificiality of such an argument is plain to see. It would necessitate accepting a fiction which the law would do well to avoid.” Similar reasoning is evident in the judgment of Gordon J, then a member of this Court, in BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746 at [100] (BHP Billiton Finance v FCT).
These observations were made in the context of overlap between the boards of a parent and a subsidiary corporation but they are just as relevant, in my view, to the coincidence of membership between the boards of Ltd and Plc. In their capacity as directors of Ltd, the individuals concerned were obliged to act in the interests of that company (and there is no evidence to suggest they did otherwise). In their separate capacity as directors of Plc, those same individuals were obliged to act in the interests of Plc (and there is no evidence to suggest they did otherwise). These obligations were imposed under the Ltd Constitution or, as the case may be, Plc Articles.[25] There may be circumstances in which these individuals would be obliged to “change hats”, to adopt a term found in United States authority, United States v. Bestfoods, 524 U.S. 51 (1998), cited with approval by Gordon J in BHP Billiton Finance v FCT at [100]. That same United States authority, as her Honour notes with approval, holds that “there is a general presumption” that the directors are wearing their ‘subsidiary hats’ and not their ‘parent hats’ when acting for the subsidiary.” It would seem to me necessarily to follow that this same presumption is abroad as between Ltd and Plc, even though one is not a subsidiary of the other.
[25] See e.g. rule 104.
The Constitution or, as the case may be, Articles each conferred on the Ltd and the Plc directors respectively an obligation to take into account the interests of the other entity (and its ordinary shareholders).[26] This obligation, as Ltd correctly submitted, is distinct from any obligation to act in accordance with the other entity's directions, instructions or wishes. The same provision in the Constitution or, as the case may be, the Articles, contains a presumptive “forgiveness” of any potential breaches of the directors' duties where the interests of the other entity are taken into account.[27] I agree with Ltd’s submission that this demonstrates that control has been preserved within each entity. The directors are “authorised and directed” to make their decisions in a way that will advance the “single unified economic entity” principle. The DLC Arrangement also allows the directors of Ltd and Plc respectively to cause each company (or its respective subsidiaries) to enter into transactions for the benefit of the QZ Group, provided that such transactions are also for the benefit of Ltd or, as the case may be, (as applicable). This ability to act in concert is consistent with Ltd’s submission that the arrangement is similar to a joint venture. It does not make them “associates” as defined.
[26] Rule 104(2) of Ltd Constitution; Rule 104(2)(a) of Plc Articles.
[27] Rule 104(2) of Ltd Constitution; Rule 104(2)(a) of Plc Articles.
These conclusions are not contradicted, contrary to the Commissioner’s submission, by cl. 13 of the Sharing Agreement. At the heart of this clause is a mutuality which sterilises any ability for either party to dictate one to the other in the event of disagreement.
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.
Ltd submitted that votes cast by Ltd or Plc ordinary shareholders on Joint Electorate Actions and Class Rights Actions could not be characterised as “directions, instructions or wishes” of Ltd or Plc (as applicable) as to how the other entity should act. It submitted that the characterisation test was objective. I agree. That was the view of Morritt LJ (with whom Potter and Morrison JJ agreed) in Secretary of State for Trade and Industry v Deverell [2001] Ch 340 at 354 in relation to the test for the application of the extended, “shadow director” definition and the analogy is compelling. It is a company law given both in Australia and in the United Kingdom that, within the limits of applicable statute law and the company’s constitution, shareholders, collectively, control a company by casting votes at a general meeting. That does not mean that the shareholders of Ltd or Plc have any legal ability to “control, usurp or exercise”, the powers of the directors of the company in which they are a shareholder: Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia (2016) 248 FCR 280 at [20] (and the authorities there cited). To this one must add for present purposes, much less do they have any such legal ability in respect of the directors of a company in which they are not a shareholder. It is not within the remit of their shareholders to control the business or acts of either entity.
The Commissioner placed reliance upon the special voting arrangements. On analysis, however, the procedure for Joint Electorate Actions entails 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. That does not amount to the communication of directions, instructions or wishes by one company to the other.
Another company law given is that an incorporated company is a legal entity separate from its shareholders: Salomon v A Salomon and Co Ltd [1897] AC 22. It necessarily follows that, when the shareholders of Ltd or, as the case may be, Plc cast their votes at a general meeting they are exercising a personal right but Ltd and Plc remain separate legal entities. Further, save to the extent that either statute or the governing constitution or articles of association permit, and none is relevant here, the shareholders of each of these companies in general meetings had no power even to express a “wish” in respect of matters consigned to the board of that company: Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia at [37] – [38].
The position as between Ltd and Plc is no different in relation to the inapplicability of the “sufficiently interested” definition if one looks for informality or what “might reasonably be expected”. Informality is absent as each of these companies during the Relevant Years sought to and did act in accordance with the DLC Arrangement, not any informal arrangement. In that arrangement also are the consequential actions which one might reasonably expect. A “reasonable expectation” requires more than a possibility but need not entail certainty: Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382; RCI Pty Ltd v Federal Commissioner of Taxation (2011) 84 ATR 785 at [127]. It entails an objective prediction as to future events based on factual indications to hand. Those may but need not include a past pattern of behaviour. It is perfectly open to reach a reasonable expectation about the future even in the absence of any past behavioural pattern. The DLC Arrangement was entered into in accordance with the wish of each company in the exercise of a judgment by its board as to what was in its own interests. Thus, for Ltd, the only relevant “wish” was its own. All that might reasonably be expected was that Ltd would act in accordance with its own wish (and the same is true of Plc). The relevant pattern of behaviour is that each of these companies, for its own reasons, wished that its actions coincide with those of the other to a single unified economic entity end. Each was accustomed to act in accordance with its own wishes. All that one might reasonably expect is that each would continue so to do.
Ltd and Plc were not “associates” as defined in the Relevant Years.
What then of QMAG?
On the evidence, there is no third party that controls the business or day to day activities of QMAG. That control is exercised by its board. There are no shams abroad here. The evidence discloses meticulous attention within the Group to the legal realities of separate legal personalities. This emerges from a study of both QMAG’s formal governance structure and the administration in the Relevant Years of that framework.
The following features of QMAG’s formal governance structure during the Relevant Years were not controversial:
(a)Pursuant to its Articles of Incorporation and the Swiss Code of Obligations (SCO), the shareholders' meeting was the supreme corporate body of QMAG.[28] The shareholders’ meeting had the following inalienable powers:
[28] Article 6 of QMAG Articles of Incorporation; Article 698 of the SCO.
(i)the adoption and the amendment of the Articles of Incorporation;
(ii)the election of the members of the QMAG Board and of its auditors;
(iii)the approval of the annual report and the annual accounts;
(iv)the approval of the annual financial statement as well as the resolution on the use of the balance sheet profit, in particular, the declaration of dividends and of profit sharing by directors;
(v)the granting of discharge to the members of the QMAG Board; and
(vi)the passing of resolutions on matters which by law or pursuant to the QMAG Articles of Incorporation were reserved to the General Meeting of the Shareholders.
(b)Pursuant to QMAG's Articles of Incorporation, the SCO and the QMAG Management Regulations, the non-transferable and inalienable powers and duties of its board included the following:
(i)the ultimate management of QMAG and the giving of the necessary, related directives;
(ii)the appointment and removal of QMAG' s officers who had managerial responsibility and who had the authority generally to represent QMAG; and
(iii)the ultimate supervision of such officers, in particular, in view of compliance with the law, QMAG's Articles of Incorporation, regulations and directives.[29]
(iv)subject to that ultimate supervision, an ability to delegate the implementation of some of the board’s duties to an Executive Committee, a Managing Director, and other managerial officers.[30]
[29] Article 12 of QMAG Articles of Incorporation; clause 3.2 of QMAG Management Regulations; Article 716 of the SCO.
[30] Clause 3.2 of QMAG Management Regulations; Article 716 of the SCO.
As a matter of law, the members of QMAG’s board were required to perform their duties with all due diligence and safeguard the interests of the company in good faith.[31] There is no evidence of any failure on the part of board members to observe this requirement.
[31] Article 717 of the SCO.
A number of relevant propositions follow from these features of QMAG’s governance structure:
(a)control of QMAG, in the sense of an ability to appoint or remove board members so as to ensure conformity with a particular policy,[32] reposed in the person who controlled the majority voting power at a general meeting - here, ultimately, Ltd; and
(b)control of QMAG in the separate sense[33] of control of its business and day to day activities reposed in its board.
[32] Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89 at 98 per Fletcher Moulton LJ, in a passage cited with express approval by Stephen, Mason and Wilson JJ in Federal Commissioner of Taxation v Commonwealth Aluminium Corporation (1980) 143 CLR 646 at 660-661.
[33] Ibid.
As to each of these propositions, it is an agreed fact and I find that QMAG was so controlled during the Relevant Years. In other words, the actions of Ltd as controlling shareholder and QMAG’s board were undertaken in accordance with the terms of its Articles of Incorporation and Management Regulations.[34]
[34] Paragraph [21], Joint Statement of Facts.
As to s 318(2)(d)(i)(B) of the ITAA1936, the Commissioner submitted that Ltd and Plc, as shareholders in QMAG and as parties to the DLC Arrangement, together sufficiently influenced QMAG for the purposes of (B), because QMAG was accustomed, or could reasonably be expected, to act in accordance with their directions, instructions or wishes. He did not contend that Plc, alone, sufficiently influenced QMAG for the purposes of s 318(2)(d)(i)(A).
One difficulty with the Commissioner’s contention is that there is just no evidence to suggest that QMAG’s board members neglected their duties or failed to act, first and foremost, in its interest. To the contrary, what is in evidence are minutes of the QMAG Board meetings during the Relevant Years. These record careful deliberations of that board and the passing of resolutions based on those deliberations.
Ltd cited in support the following examples of board conduct in its submissions as indicative of such behaviours by QMAG’s board. These examples do indeed support the conclusions stated in the preceding paragraph:
(a)QZ Group guidelines regarding policies, strategies, procedures, etc. relating to the operation of QMAG, which materially include the marketing policies or frameworks referred to by the Commissioner in submissions, were considered and approved by the QMAG’s board before being implemented. These guidelines were, necessarily, capable of being revoked or amended at any time by the QMAG’s board.[35]
(b)QMAG’s board actively evaluated matters and recommendations put to it from QMAG's perspective.[36]
(c)In some instances, QMAG’s board rejected recommendations made to it and requested revised recommendations;[37] or for amended resolutions to be put to it for consideration.[38]
(d)QMAG’s board was, as I have stated, meticulous in ensuring adherence to its corporate governance structure and compliance with board obligations under the SCO, including in relation to delegated authorities.[39]
(e)Any delegation by QMAG’s board (including under various approval or authority frameworks) was subject to its ultimate management and supervision.[40]
[35] QMAG Board Minutes: 27 January 2006, 5.3; 22 May 2006, 6.2-6.4; 28 July 2006, 6.6; 22 January 2009, 6.3; 26 November 2009, 6.3; and 19 January 2009, 6.5.
[36] QMAG Board Minutes: 25 January 2007, 5.3; 6 June 2007, 6.6; 27 September 2007, 6.2; 14 November 2007, 5.3 (penultimate paragraph); 28 May 2008, 6.1 (pg. 11-12); 24 July 2008, 6.1.
[37] QMAG Board Minutes, 12 July 2005, 6.4.
[38] QMAG Board Minutes, 5 April 2006, 7.2.1.
[39] QMAG Board Minutes, 26 September 2006, 6.6. See also: in relation to delegation, QMAG Board Minutes, 29 March 2007, 6.1-6.3; and in relation to the SCO, QMAG Board Minutes, 21 November 2006, 6.3 and 25 January 2007, 4.1.
[40] QMAG Board Minutes: 24 January 2008, 6.7; 17 March 2008, 6.7; 24 July 2008, 5.3 and 6.8; 25 September 2008, 6.3; 22 January 2009, 6.4; 29 September 2009, 6.4; 26 November 2009, 6.4; 11 March 2010, 6.4.
For reasons canvassed above in relation to Ltd and Plc, that it is possible, even probable, that QMAG’s interests regularly coincided with those of Ltd and Plc and that QMAG’s consequential actions regularly further not just its own but also the interests of those companies' interests does not mean that QMAG’s board failed to make an independent judgment when making decisions for QMAG. Further, and as Ltd correctly submitted, this did not derogate from the duties imposed upon QMAG’s board members when performing their functions (outlined above) to consider whether pursuing the interests of QMAG's parents (and its parents' ultimate shareholders) was compatible with their other obligations, particularly including their obligation to act in the interests of QMAG: Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 at 74.
Ltd submitted that QMAG was neither accustomed to treating, nor could it reasonably be expected to treat, the wishes or directions of either Ltd or Plc, or both (if that were possible), as a sufficient reason to act without more. I agree. The reason for this agreement is twofold. In law, the QMAG board was obliged to act in the best interests of that company and its shareholders. In fact, it so acted on the evidence. QMAG’s board only followed the wishes or directions of Ltd or Plc if the board considered that to do so was in QMAG’s best interests.
Ltd advanced an alternative submission. In light of the conclusion already reached it is not strictly necessary to consider this alternative for Ltd to succeed in relation to whether QMAG and it were “associates”. Lest that conclusion be in error it is as well to deal with the alternative submission. Ltd submitted that if QMAG or its directors, were accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to have acted in accordance with the directions, instructions or wishes of any other entity (which was denied), that other entity was Ltd “such that there is not scope for an argument that QMAG was sufficiently influenced by Plc and Ltd”.
Shortly put, Ltd’s alternative submission was that s 318(2)(d)(i)(B) “cannot be engaged here because QMAG has a singular controller - Ltd - thereby satisfying subpar (A)”. It submitted that Ltd alone “sufficiently influenced” QMAG for the purposes of s 318(2)(d)(i)(A) because, and on the assumption that its primary argument set out above is not accepted, by reason of Ltd's majority shareholding in QMAG (58%), QMAG can be expected to act in accordance with Ltd’s directions, instructions or wishes: NEAT Domestic Trading v AWB Ltd (2003) 216 CLR 277 at 296.
Ltd submitted that s 318(2)(d)(i)(B) is engaged only where two or more entities together “sufficiently influence” a primary entity, because neither can “sufficiently influence” the primary entity on its own. Put another way, its submission was that s 318(2)(d)(i)(B) did not operate if s 318(2)(d)(i)(A) were already satisfied by reason of a single controller already exercising sufficient influence (via s 318(6)(b) control). I agree.
As a matter of construction, the two subparagraphs, (A) and (B), in s 318(2)(d)(i) are mutually exclusive. To engage one is to exclude the other from application. On the evidence, Plc is only a minority shareholder. The Sharing Agreement does not give Plc any power to give directions to any subsidiary of Ltd. This conclusion follows from the fact that the concept of “sufficient influence” defined in s 318(6) - in particular, acting “in accordance with” directions, instructions or wishes - requires a causal link between directions, instructions or wishes and the acts of the primary entity. For s 318(2)(d)(i)(B) to apply in these circumstances, the directions of both the “controlling entity” (Plc) and the other entity (Ltd) would need to cause the primary entity (QMAG) to act in a particular way. However, under the DLC Arrangement, Plc cannot alone give directions to QMAG. It is only a minority shareholder. All that occurred in the Relevant Years was that, by the DLC Arrangement, Ltd contractually agreed with Plc to undertake certain activities. Ltd then used its capacity to give directions to its subsidiaries to procure them to carry out transactions which were in accordance with the DLC structure principles. Plc, similarly, had the capacity as shareholder to give directions to its subsidiaries. QMAG did not act "in accordance with" the directions of Plc and Ltd. There was no causing of QMAG to act in accordance with joint directions. Those of Ltd alone were sufficient to cause QMAG to act as it did.[41]
[41] Standard Chartered Bank v Antico (1995) 38 NSWLR 290 offers an apt example of such concepts.
Conclusion
Ltd has, for the above reasons, proved that the amended assessments are excessive. The objection decision should therefore be set aside. In lieu thereof, Ltd’s objection to those amended assessments should be allowed in full. The amounts included in its assessable income as “tainted sales income” were wrongly included.
It necessarily follows that related Penalty Assessments issued by the Commissioner under Division 284 of Schedule 1 to the TAA in respect of statements made by Ltd in its income tax returns for the Relevant Years, which are also the subject of objection, were wholly excessive. It also necessarily follows that Ltd has no liability in respect of shortfall interest charge.
It will fall to the Commissioner, under s 14ZZL of the TAA to make such amendments to assessments as are necessary to implement this decision. It follows from the conclusion reached in relation to Plc and QMAG that this implementation will include acting on the agreed footing specified in para. 23 in Part E in the Joint Statement, as set out above.
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