Separate Legal Entity Case Study

Overview:

Capital Pty Ltd, a wholly owned subsidiary, has challenged the Commissioner of Tax whom quashed its claim for the tax deduction for a bad debt written off to its parent company, Eastfield Ltd. As such, the key issue pivots on the tax deductibility of the failed business project undertaken by Eastfield Ltd. The prospects of effectively receiving the tax benefit will be examined via the validity of the doubts raised by the Commissioner, whom justified them on the basis that Capital Pty Ltd was incorporated as a mere conduit to Eastfield Ltd.

To reach a conclusion, the following matters should be analysed from a legal perspective:

• Were the parent and subsidiary companies deemed separate legal entities?

• Does the concept of piercing the corporate veil apply?

Separate Legal Entity:

The underlying concern of the Commissioner is the blurred distinction between Eastfield Ltd and Capital Pty Ltd stemming from their intertwined management roles. Therefore, it is paramount to analyse the nature of the legal relationship between the companies to determine the existence of distinct corporate identities. Ascertaining this aspect is instrumental to the subsidiary’s chances of success in their appeal for the tax deduction.

In the context of incorporated groups, a company becomes a legal entity that has a separate identity from that of its founders, shareholders and directors and is equipped with its own rights and liabilities like that of an individual. This significant doctrine was attested by the landmark case of Salomon v Salomon and Co Ltd. Pursuant to the principle of separate legal entity, the incorporation of Capital Pty Ltd on March 2010 establishes its status as an independent corporate personality.

Piercing the Corpo...

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...se the independent legal status that the law has conferred on each company.

In the light of the Commissioner’s weak and ‘perverse’ arguments, which failed to warrant veil piercing, the separate legal entity principle is likely to be applied to Capital Pty Ltd and Eastfield Ltd. A case that draws parallels to this case is Commissioner of Taxation v BHP Billiton Finance Ltd, which ruled against the dispute that Finance Ltd was a corporate conduit or sham. The vast similarities between the two cases include the reason behind the incorporation of the finance subsidiary, common directors and personnel, intra-group loans and the central issue of the subsidiary’s tax deductibility for the failed projects undertaken by the parent. Thus, in referring to the precedent established, the directors of Capital Pty Ltd would be advised that they should prevail in their appeal.