In BHL v CIR (7 October 2011 HC Napier, Courtney J) the High Court has dismissed efforts to have losses of one company used by another. The key issue was whether the companies had the required commonality of shareholding for them to be within a group for the purposes of offsetting losses and profits.
The commonality test requires that the companies have common shareholdings to the extent of 66%. The problem was that, although the two companies were owned by the same husband and wife shareholders, they held the shares 50/50 in one and 99/1 in the other.
The Commissioner argued successfully that the test of common voting interest required that a person be a registered shareholder. The different registered shareholding meant that the commonality test could not be established. The Court went on to consider a number of arguments that had been raised as to the effect of the relationship property legislation in New Zealand but concluded that none availed the taxpayers in this case. The case is important because it reinforces that here are legal limits on some of the generally held perceptions about the effect of relationship property law.
The basic argument of the taxpayers was that, because the shareholders were husband and wife they were presumed to hold relationship property 50/50, despite the fact that in one instance the husband was registered as holding 99% of the shares and the wife 1%. The Court reached its conclusion without reference to or analysis of cases in the area, some of which would suggest the taxpayers had a good argument, but did note the structure and effect of the Relationship Property Act. It held that the Act required some implementing step before the principles of the law operated on ownership. In other words there had to be a qualifying agreement or Court order before the statutory expectation of 50/50 ownership became real. That had not occurred in this case. The mere classification of shares as relationship property could not be relied upon to say that a spouse was presumed to be a 50% owner of the shares in the absence of an order made in respect of that property.
Next the Court concluded that because orders of the Family Court were said to be binding on the Crown, that did not mean that the Commissioner of Inland Revenue was required to abide by one when he had not been a participant. The "binding" statement was aimed at ensuring that the Crown as a party could not “duck” its responsibilities, not that it must abide by every order of the Court, even when it had not been heard on the relevant matter.
Finally the Court was asked to address the argument that a share transfer form had been entered into but not registered and that this was enough to establish share ownership and the necessary voting interest. The Court chose to resolve this by saying that registration was required (which ended the point) but also found as a fact that the form had not been completed.
On this point, had the evidence established that a share transfer form had been completed and signed, the decision might have been different, though the registration point would still have defeated the taxpayers. A person holding shares that have been transferred to someone else (in all but the legal sense) may well owe the transferee obligations as to how the shares will be voted. Those rights could be different from the voting rights of a person who is under no obligation as to how to exercise their vote. It is not clear, therefore, that the Court’s decision on this point was correct. But even if the Judge was wrong on this point, that may not have been enough to avoid a finding that the registered shareholder still "held" the voting interest despite being obliged to exercise it at the transferee's direction.
© G D Clews 2011