Franking Credits: An Example of Formalistic Corporate Veil Piercing

Abstract

Under the franking credit system of company tax in Australia shareholders can pierce the corporate veil and claim their corporation’s tax payments as prepayments for their own. Allowing shareholders to pierce the corporate veil in this way is based on the idea that a company, for tax purposes, ought to be treated like a partnership. In this paper, I discuss the fact that this inappropriately treats unalike entities alike. A large public company, for example, shares none of the features of a partnership, and so ought not to be treated like one. Treating all companies like partnerships, whether underneath the legal form of incorporation exists anything resembling a partnership or not, I call ‘formalistic veil piercing’. It involves focusing on the form and ignoring underlying social and commercial realities. I contrast the use of formalistic veil piercing under tax law with the use of the ‘formalistic separate entity principle’ in other legal contexts. The formalistic separate entity principle similarly ignores underlying social and commercial realities, though, instead of veil piercing, it applies the separate principle instead. These two formalisms, as I show, mean limited tax liability for the shareholders of large public companies, and limited tort liability for the parent companies of wholly owned subsidiaries. Because neither of these policy outcomes are desirable, I conclude that both formalisms ought to be rejected. This is the text of a talk given at the 2021 Tax Symposium: Critical Junctures/Critical Perspectives – A call for new voices in tax reform, hosted by Monash Law School