Voting interest requires registered shareholding
2011 case note - group loss offset provisions require that for a person to have a voting interest, their shares must be registered on the company's share register.
The group loss offset provisions require that for a person to have a voting interest, their shares must be registered on the company's share register.
Impact of decision
The decision has clarified the law as to what is required for parties to hold shares for the purposes of ascertaining whether a group of companies exists for the loss offset provisions.
BHL challenged the Commissioner's assessments for the 2005, 2006 and 2007 years in terms whereof the Commissioner disallowed loss offsets claimed by BHL from BIJ under the group offset provisions of the relevant Income Tax Act ("ITA").
Prior to 2000, BHL had operated two businesses; a professional practice and a car restoration business. The professional practice was profitable and the car restoration business was not. Mr B owned 396,000 shares in BHL and his wife, Mrs B, owned 4000. In 2000, BHL transferred the car restoration business to BIJ which was owned in equal shares by Mr and Mrs B.
Once the accumulated losses in BHL had been used up, BHL attempted to offset losses in BIJ against its profits. However, to offset losses there must be a group of persons whose common voting interest in each company in aggregate is equal to or greater than 66%. The aggregate of Mr and Mrs B's voting interest in the two companies was for the relevant periods only 51%.
After this came to the attention of BHL, it alleged that in October 2000 Mr B had signed a share transfer form transferring 196,000 of his shares in BHL to Mrs B. It was alleged that the form had been lost and the share transfer had therefore not been effected.
Steps were then taken to rectify the problem. In October 2006, BHL's share register was amended to reflect Mrs B as holding 50% of its shares. However, because the matrimonial property agreement transferring the shares was not executed until November 2006, the Commissioner did not accept the share transfer was effective until then.
Next, Mr and Mrs B resolved that the share register be retrospectively rectified to show the transfer of shares to Mrs B as effective from October 2000. The Commissioner did not accept this.
Finally in January 2009, Mr and Mrs B obtained a Family Court declaration that between 2000 and 2006 the 400,000 shares in BHL were "relationship property" and equally owned by them. The Commissioner refused to accept that he was bound by the order.
In dismissing BHL's challenge, the Court found that the group loss offset provisions require that for a person to have a voting interest their shares must be registered on the company's share register.
The Court held further that the fact that the shares were relationship property did not mean they were jointly owned. Mrs B is not presumed to be a 50% owner of the shares in BHL for the purpose of the group loss offset provisions.
As well, the Court was not satisfied that the Family Court had the power to make an order with retrospective effect. Even if it did, the order did not bind the Commissioner in the circumstances of the case. The Commissioner had not been a party to the Family Court proceeding.
Finally, the Court held that it would have made no difference if the share transfer form had been completed and was lost. This was 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. In any event, the evidence did not establish that any steps were taken in 2000 to effect a change to BHL's shareholding. The Court was satisfied that the share transfer form was not completed.
Income Tax Act 1994, Income Tax Act 2004