The international company which called Buildco Ltd establishes a new company in Australia which is a wholly owned subsidiary of Buildco. The purpose of incorporating the subsidiary is to solve the problem of sourcing debt finance in the international marketplace. However, the property development project which is undertaken by Buildco and funded by Asset Pty Ltd is financially unviable. Consequently, the Buildco expects that the Asset could write-off the loan as a bad debt and claim a tax deduction. Nonetheless, the Commissioner of Tax disallows the deduction for the bad debt because of the significant degree in the overlap in the management of both companies and the very large degree of control over the directors. In order to determine that whether the bad debt can be deducted, the relationship between Asset Pty Ltd and Buildco Ltd should be analyzed.
* Statute law
According to the statute law, it is likely that the subsidiary company (Asset Pty Ltd) would not write-off the loan to the parent company (Buildco Ltd) as a debt and could not claim a tax deduction for that debt. After lifting the corporation veil by making the holding company liable for the debts of its subsidiary where there are reasonable grounds for suspecting than the subsidiary is insolvent at the time of incurring the debt. In this present case, due to the failed project which is funded by the Asset Pty Ltd, the Buildco Ltd is financially unviable which lead to the company has to close down the business. As a result, it may be not feasible to solve the dispute through statute law.
* Case law
Type of companies
Companies operate in both private and public sectors of the economy and come in all sizes, large and small. Doubtlessly, the Buildco Ltd is a public company, and the later set up company which called Asset Ltd Pty is a proprietary.
It is more likely to be a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. We all know that in many respects a group of companies are treated together for the purpose of general accounts, balance sheet and profit and loss account. They are treated as one concern. This is especially the case when a parent company owns all the shares of the subsidiary – so much so that it can control every movement of the subsidiaries. These subsidiaries are bound hand and foot and must do just what the parent company says. However, it is not absolute that whether treat the parent company and a wholly owned subsidiary as a continuum. In special circumstance, the parent company and subsidiary company could not be treated as an integral structure. In the course of Buildco’s strategic plan, the corporation group is built to solve the problem of souring debt finance. Indeed, the corporation group not only solves the problem in securing credit, but also success to avoid the influence of the international financial crisis. That is, corporate group is a modern enterprise organization form which uses the Buildco Ltd (parent company) as the core of economic organization.
Parent and subsidiary companies
Besides, it is prevail that a large numbers of businesses are conducted by companies which share common directors. Such as the Buildco Ltd in the case have its subsidiaries in more than 10 countries. Subsidiary company is half of the shares are controlled by the parent company. That is to say, most of subsidiary’s property was controlled by the parent company, but the subsidiary and the parent are still separate legal entities, with all its assets shall undertake limited liability for its debts, the parent company is based on its capital contribution or subsidiary to the holdings of shares in the limit of responsibility. As to the Buildco Ltd is the holding company which controls the subsidiary’s (Asset Ltd Pty) board of the director and also is in position to cast or control maximum votes at subsidiary’s general meeting.
The agency relationship between a company and its controller is the ground most frequently argued. Indeed, agency relationship between the parent company and the subsidiary must be consistent with the following six questions: 1. Were the profits treated as the profits of the parent? Yes. In this view, the subsidiaries company (Asset Pty Ltd) will be treat all of the profits as a dividend to the parent company (Buildco Ltd). 2. Were the persons conducting the business appointed by the parent? Yes. In this present case, all decision are decided by the parent company (Buildco Ltd) and then implemented by the subsidiaries company (Asset Pty Ltd). 3. Was the parent the head and brain of the trading venture? Yes. The three directors of the subsidiaries company (Asset Pty Ltd) come from the board of parent company (Buildco Ltd). In other words, the directors should simultaneously manage the two companies. Namely, the directors overlap in management of both companies. 4. Did the parent govern the venture; decide what should be done and what capital should be used? Yes. During the board meeting, the directors of the parent company (Buildco Ltd) passed a resolution that allowed the subsidiaries company (Asset Pty Ltd) to implement a strategic. 5. Did the parent make the profits by its skill and direction? Yes. It is conspicuous to discover that the parent company (Buildco Ltd) was established in 1950, and become the one of the world’s leading international building companies via its own skills. 6. Was the parent in effectual and constant control?
Yes. The case shows that the CEO of the parent company (Buildco Ltd) has been helm the company for nearly 20 years. In addition, the parent company (Buildco Ltd) made a large profit and strict policy.
In summary, there is an agency relationship between the parent company (Buildco Ltd) and the subsidiaries company (Asset Pty Ltd). That is to say, they can be treated as a single legal entity, so the subsidiary company (Asset Pty Ltd) would not write-off the loan to the parent company (Buildco Ltd) as a debt and could not claim a tax deduction for that debt. Instead, there is a similar case which is called Commissioner of Taxation v BHP Billiton Finance Ltd (2010), the court held that the bad debt can be deducted due to the fact that the Commissioner’s submissions denying the
separate legal existence of Finance Ltd. However, there are two differences between the two cases. Firstly, in the Commissioner of Taxation case, the reason of building the subsidiary company is not only solves the problem of sourcing debt finance, but also deals with the third parties. In contrast, the subsidiary company (Asset Pty Ltd) has no deal with other companies, except the parent company (Buildco Ltd). In addition, in the case of Commission, the BHP Billiton Finance Ltd makes use of the loan in both operational activity and new project, but the Asset Pty Ltd is only fund to the project of parent company. So these two case cannot be seen as the same.
Corporate veil and veil-piercing
The corporation veil can be trusted as a theoretical screen which descends on the company when it is descend and, ordinarily, prevents outsiders from peeping in to see who is in charge or control of the company. In other words, company as a legal person must be independently with all its capital contribution shall undertake liability for its legal actions and debts of the company’s shareholders is limited to its investors assume limited liability to the company.
Lifting the corporate veil
An examination of the Australia law concerning lifting the corporate veil on the basis of an implied agency reveals that control, even overwhelming control, of a company is not sufficient to create an implied agency between the company and the controller. Through lifting the veil of corporation, it reveals that each company within the company is responsible for its own debts. However, in this case, the corporation veil would not need to lift due to the fact that it not fits the requirements of piercing veil. Indeed, there is no sham, fraud, avoid tax, trade with enemy; avoid legal obligation, and puppet. Conclusion
In conclusion, with reasons stated above, the subsidiary company (Asset Pty Ltd) would not write-off the loan to the parent company (Buildco Ltd) as a debt and could not claim a tax deduction for that debt.
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[ 1 ]. Australia Statute Law, s558v
[ 2 ]. Walker v Wimborne (1976) 137.
[ 3 ]. Limited liability exception – the UK’s “lifting the veil of the Company”, < http://www.law-walker.net/detail.asp?id=4511> [ 4 ]. Lonrho ltd. v. Shell Petroleum Co., Ltd. (1980).
[ 5 ]. Salomon v Salomon & Co Ltd (1897) AC22.
[ 6 ]. Australia Corporation Law, s46.
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