Separate Legal Entity

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Advice the directors of Finance Pty Ltd that their chances of success in successfully claiming the tax deduction for the bad debt arising from the failed business project undertaken by Iron Ore Ltd.

The Finance Pty Ltd comes within the definition of “subsidiary” in s 46 of the Corporations Act 2001. Firstly, Iron Ore Ltd, as the parent company, controls the composition of the first body’s board: the five directors of the Finance Pty Ltd are come from the Board of the Iron Ore Ltd; therefore, it is actually controlled by Iron Ore Ltd. Moreover, since Finance Pty Ltd is wholly owned by Iron Ore Ltd, it is in a position to cast more than one-half of the maximum votes at the first body’s general meeting. Furthermore, Iron Ore Ltd and Finance Pty Ltd also satisfy the requirements of “body corporate” under s 50. Although the fact that the corporate group is one entity from an economic perspective, however, under s 50 of the Corporations Act 2001 that two companies within the corporate group should be treated as two separate legal entities at common law. Therefore, the corporate veil principle in Salomon v Salomon and the veil in corporate groups in cases such as Industrial Equity Ltd v Blackburn and Walker v Wimborne generally apply. According to Peter, veil-piercing claims 40.18% succeed of the time. Although only less than half rate of successful claim, in the present case, as the position on the Finance Pty Ltd, we can conclude that, Iron Ore Ltd and Finance Pty Ltd are separate legal entity, according to Henry, even though two corporations are in the common control, they are still normally regarded as separate legal entity. As a result, Finance Pty Ltd can write off the loan to Iron Ore as a bad debt and claimed a tax deduction. Commissioner of Tax will most likely argue the agency relationship between Iron Pty Ltd and Finance Pty Ltd and lift the veil in corporate group to reject the tax deduction.
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