BHL v Commissioner of Inland Revenue HC Auckland CIV-2010-441-000355
[2011] NZHC 1201
•7 October 2011
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2010-441-000355
UNDER The Tax Administration Act 1994
IN THE MATTER OF The Income Tax Act 1994 and the Income
Tax Act 2004
BETWEEN BHL Plaintiff
AND THE COMMISSIONER OF INLAND REVENUE
Defendant
Hearing: 4-5 July 2011
Counsel: R J Cullen for Plaintiff
H Dempster and A B Goosen for Respondent
Judgment: 7 October 2011 at 2:00 PM
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 7 October 2011 at 2:00 pm
pursuant to R 11.5 of the High Court Rules.
Registrar / Deputy Registrar
Date……………………….
Solicitors: Crown Law, P O Box 2858, Wellington 6140
Fax: (04) 473-3482 – H Dempster
Counsel: R J Cullen, P O Box 22051, Khandallah, Wellington 6441
Fax: (04) 479-2152
BHL V THE COMMISSIONER OF INLAND REVENUE HC NAP CIV-2010-441-000355 7 October 2011
Introduction
[1] The plaintiff, which I call BHL,1 challenges the Commissioner of Inland
Revenue’s income tax assessments for the years ended 31 March 2005, 2006 and
2007. At issue is BHL’s right to offset its profits in those years against the losses of another company, to which I refer as BIJ, under the group offset provisions of the relevant income tax legislation.2
[2] For some years prior to 2000 BHL operated two businesses, a professional practice and a car restoration business. Its major shareholder was Mr B and his wife, Mrs B, who held 4,000 of the 400,000 shares. The professional practice was profitable but, in general, the car restoration business was not. BHL habitually set off the profits from the professional practice against the losses from the car restoration business.
[3] In late 2000 BHL transferred the car restoration business to BIJ, which was owned in equal shares by Mr and Mrs B. There were sufficient accumulated losses in BHL to continue offsetting the profit from the professional practice against the previous losses of the car restoration business until 2005. Once those losses were exhausted BHL sought to offset its profits against BIJ’s losses.
[4] In order to come within the requirements of the group offset provisions in the Income Tax Act 2004 (ITA), BHL and BIJ had to have a common shareholding as to at least 66% of their shares. But although Mr and Mrs B were equal shareholders in BIJ, Mrs B was still shown in BHL’s share register as holding only 1% of the shares.
[5] Steps were taken to rectify this problem. In October 2006, in anticipation of Mr B executing an agreement under s 21 of the Property (Relationships) Act 1976 (PRA) transferring 196,000 of his shares in BHL to Mrs B, BHL’s share register was
amended to show Mrs B as holding 50% of the company’s shares. However,
1 This judgment has been anonymised as a result of a Family Court order suppressing the names and
identifying details of the company’s shareholders.
2 Subpart IG of the Income Tax Act 1994 applied in the 2005 income tax year and subpart IG of the Income Tax Act 2004 (ITA) applied in the 2006 and 2007 income tax years. The provisions of IG 1 and IG 2 of the Acts are the same in all material respects and, for convenience, I refer simply to the ITA 2004.
because the s 21 agreement was not executed until November 2006 the Commissioner did not accept that the transfer was effective until then. As a result, the change in shareholding could not alter the tax positon for the 2005 and 2006 financial years.
[6] Next, Mr and Mrs B, as BHL’s shareholders and directors, resolved that the share register be retrospectively rectified to show the transfer of the shares to Mrs B as effective from October 2000. Mr B undertook that amendment in May 2007. The Commissioner did not accept the purported retrospective effect of this amendment.
[7] Finally, in January 2009 Mr and Mrs B obtained from the Family Court a declaration that between 2000 and 2006 the 400,000 shares in BHL were relationship property and owned equally by Mr and Mrs B. The Commissioner has refused to accept that he is bound by that order or that it has retrospective effect.
[8] The Commissioner has assessed BHL for income tax on the basis that it is not entitled to offset its profit against BIJ’s losses for the 2005 and 2006 years. BHL challenges the assessments, asserting that Mrs B was a 50% shareholder in BHL from 2000, notwithstanding that Mrs B’s increased shareholding did not appear in BHL’s share register until November 2006.
[9] The issues for determination are:
(a) Do the group offset provisions require a shareholder to be registered
on the company’s share register?
(b)Does the PRA have the effect of presuming Mr and Mrs B to have always been equal shareholders in BHL for the purposes of the group offset provisions of the ITA? A further issue arises in relation to this point, which is whether BHL is precluded by s 138G of the ITA from advancing this argument at all.
(c) Is the effect of the Family Court’s declaration retrospective and binding on the Commissioner so that, for the purposes of the group
offset provisions of the ITA, the shareholding in BHL was owned equally by Mr and Mrs B from 2000?
(d)Did Mrs B have an equal shareholding in BHL from October 2000 by virtue of a share transfer form executed by Mr B at that time?
Must an owner of shares be recorded in the share register for the purposes of the group offset provisions?
The relevant group offset provisions
[10] The offsetting of tax losses between companies under the ITA is subject to two main limitations. Section IG 2 restricts the use of a tax loss to a company that is
49% owned by the same natural persons who owned the company when the loss was incurred (the continuity restriction). Section IG 1 requires the companies concerned to satisfy the definition in s IG 1(2)(b) of a “group of companies”. The relevant prerequisite in this case is that, in relation to both companies, there is a group of persons, the aggregate of whose “common voting interests” is equal to or greater than 66% (the commonality restriction).
[11] BHL’s argument raises the question whether a person can have a “voting interest” if their name is not actually entered in the share register at the relevant time. Under s OB 1 of the ITA a “voting interest” means:
… for a person and a company and a time, the percentage voting interest that the person is treated as holding in the company at the time under sections OD 2 to OD 6 (which relate to the measurement of control and ownership interests).
(emphasis added)
[12] And under s OD 3:
… a person’s voting interests in a company at any time equals the percentage of the total shareholder decision-making rights in respect of the company at that time carried by shares or options held by the person at that time.
(emphasis added)
[13] Once a person is identified as holding a voting interest for the purposes of s OB 1, whether they then have a “common voting interest” for the purposes of s IG
1(2)(b) is determined by s IG 1(5) which defines a person’s “common voting interest”. The effect of s IG 1(5) is that, if the voting interests in each company are the same, the shareholder’s common voting interest will be the percentage voting interest held in each of the companies at the relevant time. If the percentage voting interests are different then the common voting interest is the lower of the percentage voting interests of the person in each of the companies at the time.
[14] However, none of these provisions assist in deciding what constitutes shares “held by the person”. Mr Dempster, for the Commissioner, argued that, although “held” is not defined in any of the ITAs, the concept of “holding” a share is well known in company law to mean having one’s name entered in the share register as a shareholder. Section 96 of the Companies Act 1993 defines a shareholder as:
… a person whose name is entered in the share register as the holder for the time being of 1or more shares in the company.
[15] There is very strong support for this argument in Avon Downs Pty Ltd v Federal Commissioner of Taxation3 and Dalgety Downs Pastoral Ptd Ltd v Federal Commissioner of Taxation.4 Both concerned the deduction of losses for tax purposes under the relevant Australian legislation. In Dalgety Downs the High Court of Australia held that shares “beneficially held” for the purposes of determining who
held the voting power in a company at the relevant time (in the context of income in one year against losses from prior years) required that the name of the shareholder be entered in the register of members:
Dixon J so held in Avon Downs Pty Ltd v Federal Commissioner of Taxation,
… basing his conclusion upon the view that in the terminology of company
law shares are said to be “held” by the person who is registered as a shareholder in respect thereof, and that s 80(5), being concerned with voting power, should be treated as using that terminology. We share this view. Indeed, it is not too much to say that the verb “hold” and its variants, when used in relation to shares in companies, normally refers to the legal ownership of the shares according to the register of members.
3 Avon Downs Pty Ltd v Federal Commissioner of Taxation [1949] HCA 26 at 363.
4 Dalgety Downs Pastoral Ptd Ltd v Federal Commissioner of Taxation [1952] HCA 54,
[16] I accept that, for the purposes of the group company offset provisions of the ITA, Mrs B had to be recorded in the share register of the company as being a shareholder at least to the extent of 50% of the company’s shares. It is common ground that she was not and that alone should be sufficient to determine the issues raised by BHL. However, for completeness, I go on to consider the BHL arguments.
Does the PRA have the effect of presuming the BHL shares to be jointly owned for the purposes of the commonality test?
[17] Mr Cullen, for BHL, argued that the shares in BHL were always relationship property under the PRA and were therefore presumed to be owned jointly for all purposes, including the commonality provisions of the ITA from the time they were first acquired.
[18] Mr Cullen developed this argument by reference to the definition of relationship property in s 8(ee) of the PRA and to a number of another sections which, he submitted, showed that the equal sharing philosophy that underlies the PRA means that relationship property is always to be regarded as jointly owned, even in the absence of a specific court order. In particular, s 1M(c) identifies, as one of the purposes of the PRA:
To provide for a just division of the relationship property between the spouses or partners when their relationship ends by separation or death, and in certain other circumstances …
[19] Mr Cullen also focused strongly on the sections in the PRA that deal with the interaction between proceedings under that Act and other proceedings. He identified s 4(4) as a critically important provision. It provides that:
Where, in proceedings that are not proceedings under this Act, any question relating to relationship property arises between spouses or partners, or between either or both of them and any other person, the question must be decided as if it had been raised in proceedings under this Act.
[20] Mr Cullen submitted that this provision required that questions in any proceedings concerning property that is relationship property must be decided by looking at the property from the perspective of the PRA so that the purposes, principles and provisions of the PRA are relevant and courts are generally obliged to
have regard to the protections of spouses and partners as regards relationship property. Mr Cullen submitted that this provision was bolstered by s 4A which requires that:
Every enactment must be read subject to this Act, unless this Act or the other enactment expressly provides to the contrary.
[21] It is perfectly clear that the shares were always relationship property under s 8(ee). However, the status of the shares as relationship property does not mean that they were always presumed to be jointly owned; ownership of relationship property depends on the division of such property under the Act and orders giving effect to such division.
[22] The starting point is s 1M which identifies the purposes of the Act:
(a) to reform the law relating to the property of married couples and civil union couples, and of couples who live together in a de facto relationship;
(b) to recognise the equal contribution of husband and wife to the marriage partnership, of civil union partners to the civil union, and of de facto partners to the de facto relationship partnership;
(c) to provide for a just division of the relationship property between the spouses or partners when their relationship ends by separation or death and in certain other circumstances, while taking account of the interests of any children of the marriage or children of the civil union or children of the de facto relationship.
[23] The purposes of s 1M are, however, to be achieved through the process of division by the Court. Section 11 makes this clear:
(1) On the division of relationship property under this Act, each of the spouses or partners is entitled to share equally in –
...
(c) any other relationship property. (emphasis added)
[24] Further, far from the PRA applying to relationship property for all purposes, Part 3 of the Act identifies the specific circumstances to which the Act applies. The first is the division of relationship property where both partners are still alive but are
living apart or separated, or the marriage or civil union has been dissolved, or the de facto relationship no longer exists, or where one partner is endangering the relationship property or is a discharged bankrupt.5 The second is to the division of relationship property on the death of a spouse or partner.6 The third is the
application of the Act “in other circumstances”.7
[25] The “other circumstances” are, however, circumscribed and, relevantly, include “the circumstances described in s 25(3)”.8 Section 25 is the provision that confers the power to make orders under the Act. It provides:
(1) On an application under section 23, the Court may –
(a) make any order it considers just –
(i) determining the respective shares of each spouse or partner] in the relationship property or any part of that property; or
(ii) dividing the relationship property or any part of that property between the spouses or partners:
(b) make any other order that it is empowered to make by any provision of this Act.
(2) The Court may not make an order under subsection (1) unless it is satisfied, –
(a) in the case of a marriage or civil union, –
(i) that the husband and wife or civil union partners are living apart (whether or not they have continued to live in the same residence) or are separated; or
(ii) that the marriage or civil union has been dissolved;
or
(b) in the case of a de facto relationship, that the de facto partners no longer have a de facto relationship with each other; or
(c) that 1 spouse or partner is endangering the relationship property or seriously diminishing its value, by gross mismanagement or by wilful or reckless dissipation of property or earnings; or
5 Property (Relationships) Act 1976, s 10A.
6 Ibid, s 10B.
7 Ibid, s 10C.8 Ibid, s 10C(b).
(d) that either spouse or partner is an undischarged bankrupt.
(3) Regardless of subsection (2), the Court may at any time make any order or declaration relating to the status, ownership, vesting, or possession of any specific property as it considers just.
(4) To avoid any doubt, but without limiting subsection (3), if proceedings under this Act are pending, the Court, if it considers it appropriate in the circumstances, may make an interim order under that subsection for the sale of any relationship property, and may give any directions it thinks fit with respect to the proceeds.
(5) This section is subject to the other provisions of this Act.
(6) In proceedings commenced after the death of 1 of the spouses or partners, this section is modified by s 91.
(emphasis added)
[26] Section 25(3) does not, therefore, confer an unfettered power to make any order the Court considers just but only an ancillary power to that conferred under s
25(1), enabling the Court to make orders, notwithstanding that the prerequisites in s
25(2) may not have been satisfied. It is still limited to the making of orders either determining the respective shares in relationship property or dividing the relationship property9 or making any other order that the Court is empowered to make by the provisions of the PRA.10
[27] I am satisfied that merely satisfying the definition of relationship property under the PRA has no effect on the legal ownership of property unless and until an order under the PRA has been made. Tipping J reached this same conclusion in Reid v Commissioner of Inland Revenue.11 The issue in that case was whether Mr Reid should be liable for income tax on income generated from assets during the period before court orders were made vesting 40% of the income from the assets in his
former wife as relationship property. Rejecting the argument that Mr Reid should be regarded, retrospectively, as not being the owner of the property, Tipping J said:
… the fundamental flaw in Mr Reid’s primary argument was that it confused classification with division. Just because certain assets are classified as matrimonial property does not mean that those assets are ipso facto vested in the spouses in the assessed shares. It is the method of division which determines which assets are ultimately vested finally in each spouse. The
9 Ibid, s 25(1)(a).
10 Ibid, s 25(1)(b).
11 Reid v Commissioner of Inland Revenue (1990) FRNZ 410 (HC).
assets remain in the ownership of the spouse with title outside the Act, at least as far as the Commissioner is concerned, unless and until a particular asset is vested in the other spouse pursuant to the Act.
[28] Further, the suggested effect of the PRA in the absence of any order would seem to run counter to s 41, which provides for the means of effecting orders made in relation to property (including company shares) to which title passes upon registration:
(1) Where an order made under this Act relates to any estate or interest in land, a copy of the order sealed with the seal of the Court shall, upon application by either of the parties and upon payment of the prescribed fee, be registered by the District Land Registrar or the Registrar of Deeds, as the case may be, or by the Mining Registrar in any case where the order relates to land comprised in a licence within the meaning of the Mining Tenures Registration Act 1962 that has not been registered under the Land Transfer Act 1952 …
(4) Where an order made under any of the provisions of this Act relates to any stocks, shares or other company securities, or to any other property the title to which passes upon or is evidenced by registration, the foregoing provisions of this section shall apply with all necessary modifications to such stocks, shares, securities or other property as if they were estates or interests in land.
[29] I find that the commonality provisions of the ITA are not a circumstance to which s 25(3) applies. The fact that the BHL shares were relationship property does not mean that Mrs B was a 50% shareholder.
Is BHL precluded from raising this point?
[30] Given my conclusions on BHL’s substantive argument it is, strictly, unnecessary to canvass the Commissioner’s objection to its right to advance the argument at all. I do so only briefly and for completeness.
[31] Under s 138G of the Tax Administration Act 1994 (TAA) a disputant may raise in a challenge only the propositions of law that are disclosed in either the Commissioner’s statement of position or the disputant’s statement of position. This provision is intended to support the “cards on the table” philosophy of the TAA.
[32] BHL’s statement of position raised the PRA only in relation to the
retrospective and binding effect of the 2009 Family Court declaration. There is no
suggestion in the legal argument set out in the statement of position to suggest reliance on the argument discussed earlier that, absent a court order, the PRA nevertheless has the effect of rendering relationship property jointly owned by the parties to the relationship. I am satisfied that, even if my decision regarding the argument had been different, BHL would have been precluded from advancing it.
Does the Family Court order have retrospective effect and bind the
Commissioner?
[33] In January 2009 the Family Court made declarations and an order on the papers and without reasons. They included:
1. That the 400,000 shares owned by the Applicants in BHL between
30 October 2000 and 21 November 2006 were: (i) Relationship Property; and
(ii) Owned as to 200,000 shares by [Mr B] and as to 200,000 shares by [Mrs B].
[34] Mr and Mrs B sought this order following the Commissioner’s refusal to accept that either the s 21 agreement executed in November 2006 or the purported retrospective amendment of the BHL share register had the effect of rendering Mrs B a 50% shareholder in BHL prior to the 2007 financial year. BHL maintains that the Family Court order has retrospective effect and is binding on the Commissioner.
Does the Family Court order have retrospective effect?
[35] BHL argued that, by virtue of s 3, which provides that the Act “shall bind the Crown”, orders made by the Family Court were binding on the Commissioner. Mr Cullen relied on Re Ivory as authority for that proposition and also for the proposition that the Family Court could make orders under the PRA regarding the status of relationship property that had retrospective effect.12 I do not accept either argument.
[36] Re Ivory concerned an application by a married couple under s 25(3) of the Matrimonial Property Act 1976 for an order that the orchard owned by the husband for many years and the proceeds of its sale were, and continued to be, matrimonial property held by the couple in equal shares. The property had been held in the name of the husband but both were involved equally in the running of the operation. The proceeds of sale were invested in the husband’s name but interest from the investment was returned for income tax purposes by both in equal shares.
[37] Barker J made an order that the orchard (long since sold) and the proceeds of its sale were jointly owned as relationship property. It appears, however, that a number of relevant authorities were not considered. Significantly, in granting the order, Barker J made it clear that he regarded the case as an exceptional one and his decision was not to be regarded as being of precedential value.
[38] As to whether an order by the Family Court is binding on the Commissioner, I note that in Re Ivory the position of the Commissioner (who was not represented) was not specifically referred to. Nor was there any reference to the decision in Commissioner of Stamp Duties v Shrimpton which makes clear the effect of a provision in the form of s 3.13 In Shrimpton Myers CJ considered whether the Commissioner of Stamp Duties was bound by an order of the Court of Review under the Mortgagors and Lessees Rehabilitation Act 1936, s 5 of which declared that the Act binds the Crown:
It is true that the Mortgagors and Lessees Rehabilitation Act, 1936, is declared by s 5 thereof to bind the Crown. But that provision, as is pointed out by Smith J, in Schaeffer’s case, was no doubt inserted for the primary purpose of binding the Crown by orders adjusting liabilities to the Crown, and indeed it was a necessary provision in view of the fact that the Crown in its various departments has by far the largest mortgage business in New Zealand. It cannot mean that the Crown is to be bound in all circumstances and in all respects by every order which the Court of Review or an Adjustment Commission may think fit to make. It means that the Crown may be made a party to any proceedings in which it is interested, and that it is bound by an order properly made in those proceedings.
[39] Nor do I accept that Re Ivory supports the proposition that the Family Court order has retrospective effect. Barker J referred to three Family Court decisions,
with approval, in concluding that Family Court had jurisdiction to make a retrospective order under s 25(3).14 However, there was no reference to Tipping J’s decision in Reid v Commissioner of Inland Revenue, to which I have already referred.15 In Reid,it appeared to be assumed (without argument) that the decision of the Family Court could apply retrospectively, but Tipping J cautiously observed that:
Any order of the Court (assuming it could properly be made) retrospectively affecting that fundamental starting point so as to bind the Commissioner would have to be expressed in the clearest of terms and there is no such order in the present case.
[40] I am not at all satisfied that the Court does have the power to make an order with retrospective effect. But, even if it did, it is obvious that the terms of the order in this case fall well short of being sufficiently clear to bind the Commissioner.
Is the Commissioner precluded from denying the effect of the Family Court?
[41] In late 2008 BHL’s advisers were considering an application to the Family Court as a means of achieving retrospective confirmation that Mrs B had owned 50% of the BHL shares since 2000. The clear, indeed only, objective for such an application was to persuade the Commissioner of this fact so as to allow BHL access to BIJ’s 2005 and 2006 tax losses.
[42] Despite the Commissioner making it clear that he wished to be apprised of the application when it was made and to be heard on the application, BHL’s counsel submitted to the Family Court that there was no need to give notice to the Commissioner, and that position was accepted by the Family Court Judge. In argument before me there was criticism of this conduct and I agree that the correspondence and submissions seems disingenuous. It is not, however, necessary to consider this aspect further in determining the issue before me, which is whether the Commissioner should be precluded from denying the effect of the Family Court
order by his decision not to appeal against the decision.
14 Climie v Climie FC Auckland FP004/1675/92, 16 June 1993; Ross v Ross FC Auckland
FP004/1615/92, 16 June 1993; Wilson v Wilson (No 2) (1991) 7 FRNZ 519 (DC).
15 Reid v Commissioner of Inland Revenue (1990) 6 FRNZ 410 (HC).
[43] Mr Dempster accepted that the Commissioner could have appealed the decision under s 39(2) which provides that “[a] party to proceedings in which there is made a decision to which subsection (1) applies or any other person prejudicially affected by the decision may appeal to the High Court against the decision”. The Commissioner was provided with a copy of the order several weeks before the time for appealing under s 39(2) of the PRA expired, but it appears that the solicitors acting at the time were under the impression that the Commissioner could not exercise the right of appeal and, further, that any such appeal would be unlikely to succeed.
[44] I do not accept that merely because the Commissioner did not exercise the right of appeal available to him he must therefore be regarded as bound by the Family Court order. The Commissioner was not a party to the original application. Indeed, the original application was conducted very deliberately on the basis that the Commissioner would not participate. In those circumstances it would be a breach of natural justice to suggest that he should now be bound by the decision and a right of
appeal would not remedy that.16
Did Mrs B have an equal shareholding in BHL before 2006 by virtue of a share transfer form executed in 2000?
[45] BHL claims that in October 2000, as part of the re-organisation of its business under which BIJ acquired the car restoration business, Mr B signed a share transfer form that had the effect of transferring 196,000 of his shares in BHL to Mrs B. This transfer cannot be found. BHL claims that it has been lost but the fact it was signed is nevertheless effective to transfer the ownership to Mrs B.
[46] It is evident from my conclusion at [16] that this argument must fail because Mrs B could only acquire ownership of the shares for the purposes of the ITA by being recorded in BHL’s share register as the owner. For completeness, however, I
address the evidential issue.
16 Reid v Rowley [1977] 2 NZLR 472 (CA) at 481.
[47] BHL was originally incorporated to run the car restoration business but, in
1996, Mr B took advantage of changes that permitted him to operate his professional practice by way of an incorporated company and transferred his practice to BHL. Although this had the advantage of enabling BHL to offset its profit against the losses of the car restoration business, it also had disadvantages; for example, any attempt by BHL to raise finance for the profitable professional practice would be hampered by the accounts that reflected the losses associated with the car restoration business. This was the reason for transferring the car restoration business to BIJ, with BHL retaining the professional practice.
[48] There is no doubt that the continued offset of the car restoration business losses against professional practice profits was prominent in the thinking of both Mr B and BHL’s accountant, Mr C, when the decision was made to transfer the car restoration business to BIJ. But there is no contemporaneous record of any steps taken to address the issue.
[49] Mr B’s evidence was substantially given in the form of his affidavits
11 December 2007 and 17 December 2008, the contents of which he confirmed before me. In his affidavit of 11 December 2007 Mr B said:
3.It was agreed by my wife and I after taking advice from our accountants, indeed it was from a tax efficiency perspective, imperative that the shareholding on both [BHL] and [BIJ] be equal. The shareholding in [BIJ] had always been equal but that was not the position with [BHL].
4.As a consequence of the decision being made with regard to the shareholding in BHL I would have signed a share transfer transferring sufficient shares to my wife that there was equality of shareholding between us. This share transfer would have been prepared by my accountants. I cannot specifically recall signing the share transfer because:
(a) It was some years seven years ago now, and
(b) It was not a document that stuck out as being unusual such that I would remember it (although, of course, it was important), and
(c) It is the type of matter that I leave to my accountants, and
(d) There are often documents that my accountants require me to sign from time to time.
But I have no doubt whatsoever that the share transfer was signed by me.
[50] In his affidavit 17 December 2008, sworn in relation to PRA, Mr B said:
19.I cannot now recall whether or not in 2000 Mr [C] told me: (a) that it was simply enough that the shareholders in the two companies be the same, regardless of the amount of shares held by each shareholder; or (b) that the shareholdings in the two companies had to be exactly the same and that there would need to be a transfer of some of my shares in [BHL] to [Mrs B] in order to equalise our shareholdings in that company and make it correspond to the percentage shareholding in [BIJ].
20.Either way, I assumed that whatever steps and documentation that needed to be attended to in order to achieve the appropriate outcome had been undertaken by the accountant.
[51] In cross-examination Mr B said that he later recalled signing documents that had come in the post from Mr C. However, he could not recall what the documents were. He has never been able to produce a copy of a signed share transfer.
[52] Mrs B gave evidence, but not in relation to the signing of a share transfer form. It was evident that she had no active involvement in either company and little or no understanding of the tax issues confronting BHL.
[53] Mr C also gave evidence by way of confirming the contents of previous affidavits and certain documents. One of the affidavits he confirmed was an unsworn affidavit in which he said:
3.Also as the losses from the car operations helped offset the profits in the … practice, it was agreed that the shareholding needed to be identical in both companies.
4.I believe that the shares in question in [BHL] were transferred back in 2000 including but not limited to the following:
I would have prepared a share transfer form.
That at the time Mrs [B] was made a director of [BHL] and has been treated as a director ever since, in spite of the company records not showing that ...
7.I cannot recall completing the share transfer form or receiving it back. There were a number of factors at the time of the sale and in the subsequent years which would have affected any recall of the events surrounding the re-structure.
[54] Mr Dempster submitted that the lack of any documents evidencing a change in BHL’s shareholding in 2000 or 2001 was explicable, not as a result of the loss of documents by Mr C, but by Mr C’s misunderstanding of the group offset rules. Mr Dempster suggested that the most likely explanation is that Mr C believed he was dealing with an issue of continuity of shareholders (i.e. the identity of shareholders in a company) as opposed to commonality of shareholders (the extent of the shareholding in the relevant companies). As a result, Mr Dempster submitted, Mr C did not, in fact, see any need to change BHL’s shareholding much less do anything to effect a change.
[55] Mr C maintained that he did appreciate the requirements for group offsets. But whether he did or not, I am satisfied that no step was taken in 2000 to effect a change to BHL’s shareholding. First, there is no contemporaneous record that the transfer existed. Even if the transfer itself had been lost, one would expect some reference to it in a note or covering letter from that time. Secondly, in the years immediately following the re-organisation of the businesses the BHL financial statements gave no indication of any change having been made to the shareholding. Thirdly, Mr C’s account of his own affairs during 2000 reinforces the likelihood that no step was taken that year (or probably even in 2001). Mr C was overseas in late October 2000 and at that time the partnership he was in was undergoing an acrimonious dissolution. On his return he faced a good deal of work in relation to the partnership’s affairs. In addition, he had a backlog of professional work which was exacerbated by the resignation of his personal assistant in early 2001. Those circumstances, coupled with the complete absence of any evidence that a share transfer form was prepared or signed, satisfy me that this was not done.
Conclusion
[56] The fundamental issue in this case is whether BHL could satisfy the commonality requirement of the ITA group offset provisions during the period that Mrs B was shown in its share register as holding only 1% of the shares. My conclusion is that it cannot do so because:
(a) Under the group offset provisions only a shareholding that is recorded in the company’s share register at the relevant time will satisfy the definition of a voting interest, by which fulfilment of the commonality requirement is determined;
(b)Even though BHL shares satisfy the definition of relationship property under the PRA, Mrs B is not presumed to be a 50% owner of the shares for the purposes of the group offset provision in the absence of an order under the PRA;
(c) The order of the Family Court made in January 2009 is not binding on the Commissioner; and
(d)There is insufficient evidence to show that a share transfer form in favour of Mrs B was executed in 2000 but, in any event, the execution of such a document would not have made her a 50% owner of the shares for the purposes of the group offset provisions.
[57] There will be judgment in favour of the defendant.
[58] Parties may address the issue of costs by memoranda filed on behalf of the defendant by 14 October 2011, by the plaintiff by 21 October 2011 and by the
defendant in reply by 28 October 2011.
P Courtney J
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