The label "associate" is used often in the tax legislation and the consequences are almost never advantageous. Usually, it doesn’t pay to be someone’s associate.
In a business context, being an associate is generally a product of "vertical" ownership relationships. Holding companies are associates of their subsidiaries and vice versa. Sister entities are also associates where there is a common controller.
There is no specific provision that makes entities associates merely because they have common ownership or the same management. In the context of stapled groups and dual listed company (DLC) structures, the Commissioner has argued that the catch-all "sufficient influence" part of the definition applies to make the two or more sides of the structure associates. However, the recent AAT case of MWYS suggests that this will usually not be the case.
The sufficient influence part of the definition of associate provides that one entity (the "influencer") will "sufficiently influence" an entity if the influenced entity (or its directors):
- is under an obligation (whether formal or informal);
- is accustomed to act; or
- might reasonably be expected, to act
in accordance with the directions, instructions or wishes of the influencer.
In 2012, the ATO issued a draft Taxation Ruling (TR 2012/D5, now withdrawn) in respect of whether s974-80 could apply to stapled groups. In order to trigger s974-80, it is necessary that the trust and the company be associates. The Draft Ruling took the position that, in a stapled group, "the trust may … be sufficiently influenced by the company" and pointed to a number of clauses commonly found in the stapling agreement as the evidence of "sufficient influence". The conclusion in the Ruling was driven by the fact that, "the two entities act effectively as one economic entity" and since that is so, "when the trustee makes decisions about borrowing or lending to the company, or other decisions in the capacity of trustee, it will act in accordance with the wishes of the company for the benefit of stapled security holders."
In MWYS, the Commissioner sought to apply the controlled foreign company (CFC) provisions to a taxpayer (the Australian side of a DLC) on the basis that sales to a subsidiary of the foreign side of the structure were sales to an associate. The ATO ran 2 arguments:
- the offshore subsidiary was accustomed to act in accordance with the wishes of the top entity on the Australian side of the DLC (as well as its own parent); or
- the top entities of each side of the DLC might reasonably be expected to act in accordance with the wishes of the public holding the DLC interests.
The ATO failed in both arguments.
Justice Logan was willing to accept the idea that, "‘one might, intuitively, consider the [parties] “associates” within the ordinary English meaning of that word" but held that the parties were not "associates" as the term is defined in the legislation. Justice Logan emphasised:
- there was no provision in the agreement between the DLC entities allowing one of them to give instructions or directions to the other;
- the constitutions of all of the entities made their respective Boards responsible for the management of their entity, and the Boards of the entities all behaved on that basis;
- the fact that the same people sat on the Boards of several entities did not change this in the absence of any evidence that the Board members failed in their duty to act in the best interests of each entity separately;
- instead, the judge highlighted the evidence of "meticulous attention within the Group to the legal realities of separate legal personalities [in] both … [the] formal governance structure and the administration … of that framework."
Logan J describes the arrangement as the joint execution by equals of a common project rather than the imposition of the will of one on the operations of others: "each chose to act in concert [but] neither chose to act in subservience, formal or informal, to the other nor to anyone else …" including the offshore subsidiary.
The reasoning of Logan J suggests that “sufficient influence” is directed towards relationships that are akin to parent and subsidiary. Situations of common ownership, where each party makes its own decision to pursue a co-operative arrangement should not involve sufficient influence.
While MWYS dealt with a DLC structure, the principles outlined by Logan J would suggest that the trust side of a staple is not an associate of the company side. Although the directors of the trustee may be the same as the directors of the company, each entity will act in its best interests, having regard to the stapling provisions of its constitution, and will not simply act at the direction of the other entity.