Lilyvale Hotel Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD1193/2008)
Judgment date: 6 March 2009
Date published: 10 September 2009
Decision outcome: Adverse

Summary of decision:
Outlines the Tax Office's response to this case which concerned the application of the same business test to a taxpayer who, following a change in ownership, assumed control of the day to day running of its hotel previously conducted by a related entity.

Overview of facts:
The appeal concerned the disallowance of a deduction, on the basis that the taxpayer did not satisfy the same business test under ss165-13 and 165-210 of ITAA97 for the income period 1 January 2002 to 31 March 2003 (in lieu of the year ended 30 June 2003). | In relation to the continuity of ownership test, it was common ground between the parties that the taxpayer would not satisfy it and, consequently, it was not considered in the appeal. | From 1993, the taxpayer had been the leasehold owner of land on which it had constructed a hotel in the Rocks area of Sydney. The hotel had commenced operation in September 1992. In 1989, by way of a management agreement, the taxpayer appointed another Australian resident company, ANA Enterprises Australia Pty Limited ("Enterprises Australia") as operator and manager of the hotel for a term of 20 years. Essentially, under the terms of the management agreement, Enterprises Australia received a management fee and in return ran the hotel. | Until August 2002, both the taxpayer and Enterprises Australia were members of the ANA group which was ultimately owned by a Japanese resident company. In August 2002, the taxpayer was acquired by a subsidiary of the Government of Singapore Investment Corporation. From this time until 31 March 2003, being the end of the relevant time period for this appeal, the business of the hotel continued unchanged. However, from August 2002, the taxpayer commenced to operate and manage the hotel as well as own it. The management agreement was terminated accordingly. | At all material times the taxpayer's income was derived from the hotel business. | At first instance Stone J decided the appeal in favour of the Commissioner on the basis that: a. The taxpayer as owner of the hotel and Enterprises Australia as the manager of the operations of the hotel, engaged in very different activities. b. Applying Federal Commissioner of Taxation v Murry (1998) 193 CLR 605, the taxpayer's involvement in the business of the hotel was so distant from the day-to-day activities of the hotel that the repetitive and continuous conduct of running a hotel could not be said to be the business activity of the taxpayer. c. Although Enterprises Australia was expressed as the agent of the taxpayer under the management agreement, that did not mean the activities of Enterprises Australia should be attributed to the taxpayer. d. Following the change in ownership of the taxpayer and the termination of the management agreement, the taxpayer assumed the conduct of activities previously carried out by Enterprises Australia. This constituted a change in the business of the taxpayer. Accordingly, the assessment was not excessive as the deductions were properly denied on the basis that the taxpayer failed the same business test. | a. The taxpayer as owner of the hotel and Enterprises Australia as the manager of the operations of the hotel, engaged in very different activities. b. Applying Federal Commissioner of Taxation v Murry (1998) 193 CLR 605, the taxpayer's involvement in the business of the hotel was so distant from the day-to-day activities of the hotel that the repetitive and continuous conduct of running a hotel could not be said to be the business activity of the taxpayer. c. Although Enterprises Australia was expressed as the agent of the taxpayer under the management agreement, that did not mean the activities of Enterprises Australia should be attributed to the taxpayer. d. Following the change in ownership of the taxpayer and the termination of the management agreement, the taxpayer assumed the conduct of activities previously carried out by Enterprises Australia. This constituted a change in the business of the taxpayer. Accordingly, the assessment was not excessive as the deductions were properly denied on the basis that the taxpayer failed the same business test. | The taxpayer appealed to the Full Federal Court and the appeal was allowed. | The Commissioner did not apply for special leave to appeal to the High Court. | Issues decided by the Full Federal Court | Same business test and agency | The Commissioner argued that the termination of the management agreement after the change in ownership, with the consequence that the taxpayer commenced to operate and manage the hotel as well as own it, was sufficient to amount to a change in the business of the taxpayer. Accordingly, the taxpayer failed the same business test. | The taxpayer argued that the activities of Enterprises Australia as manager of the taxpayer's hotel business until August 2002 were attributable to the taxpayer under the law of agency. Further, the activities of an agent being attributable to its principal, are to be properly taken into account in characterising the business of the principal for the purposes of the same business test. Accordingly in this case, the taxpayer, as principal, should be taken to have been carrying on the same business during the relevant period of (as the taxpayer described) ' owning and operating ...[ a ] hotel to derive revenue from its guests and profits from its operation' . | The Full Court found that: a. The business of the taxpayer was the same business in the relevant period and the losses carried forward were deductible. b. The proper test was Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 97, under which at all relevant times the taxpayer derived its income from the business activity of operating the hotel it owned, which activity was identical prior to, and after, the change in ownership of the taxpayer:. c. Enterprises Australia was the agent of the taxpayer under the proper construction of the management agreement. Consequently, there was no impediment to attributing the day to day activities of operating the hotel as those of the taxpayer. d. Where the activities giving rise to the source of income of the taxpayer are carried out by its agent, such activities are to be taken into account in the characterisation of the appellant's business. For the purposes of the 'same business test' whether or not a business is conducted through a manager is not determinative of what is the proper characterisation of that business. | a. The business of the taxpayer was the same business in the relevant period and the losses carried forward were deductible. b. The proper test was Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 97, under which at all relevant times the taxpayer derived its income from the business activity of operating the hotel it owned, which activity was identical prior to, and after, the change in ownership of the taxpayer:. c. Enterprises Australia was the agent of the taxpayer under the proper construction of the management agreement. Consequently, there was no impediment to attributing the day to day activities of operating the hotel as those of the taxpayer. d. Where the activities giving rise to the source of income of the taxpayer are carried out by its agent, such activities are to be taken into account in the characterisation of the appellant's business. For the purposes of the 'same business test' whether or not a business is conducted through a manager is not determinative of what is the proper characterisation of that business.

Issues decided:
Same business test and agency: The Commissioner argued that the termination of the management agreement after the change in ownership, with the consequence that the taxpayer commenced to operate and manage the hotel as well as own it, was sufficient to amount to a change in the business of the taxpayer. Accordingly, the taxpayer failed the same business test. The taxpayer argued that the activities of Enterprises Australia as manager of the taxpayer's hotel business until August 2002 were attributable to the taxpayer under the law of agency. Further, the activities of an agent being attributable to its principal, are to be properly taken into account in characterising the business of the principal for the purposes of the same business test. Accordingly in this case, the taxpayer, as principal, should be taken to have been carrying on the same business during the relevant period of (as the taxpayer described) ' owning and operating ...[ a ] hotel to derive revenue from its guests and profits from its operation' . The Full Court found that: a. The business of the taxpayer was the same business in the relevant period and the losses carried forward were deductible. b. The proper test was Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 97, under which at all relevant times the taxpayer derived its income from the business activity of operating the hotel it owned, which activity was identical prior to, and after, the change in ownership of the taxpayer:. c. Enterprises Australia was the agent of the taxpayer under the proper construction of the management agreement. Consequently, there was no impediment to attributing the day to day activities of operating the hotel as those of the taxpayer. d. Where the activities giving rise to the source of income of the taxpayer are carried out by its agent, such activities are to be taken into account in the characterisation of the appellant's business. For the purposes of the 'same business test' whether or not a business is conducted through a manager is not determinative of what is the proper characterisation of that business. a. The business of the taxpayer was the same business in the relevant period and the losses carried forward were deductible. b. The proper test was Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 97, under which at all relevant times the taxpayer derived its income from the business activity of operating the hotel it owned, which activity was identical prior to, and after, the change in ownership of the taxpayer:. c. Enterprises Australia was the agent of the taxpayer under the proper construction of the management agreement. Consequently, there was no impediment to attributing the day to day activities of operating the hotel as those of the taxpayer. d. Where the activities giving rise to the source of income of the taxpayer are carried out by its agent, such activities are to be taken into account in the characterisation of the appellant's business. For the purposes of the 'same business test' whether or not a business is conducted through a manager is not determinative of what is the proper characterisation of that business.

ATO view of decision:
Same business test | The Commissioner considers the case has been decided on its facts in accordance with established principles governing the operation of the same business test. The joint judgment acknowledges the authority of Avondale Motors and the general principle that the same business test requires a continuing identity (as opposed to similarity) of the taxpayer's business which is to be determined by an evaluation of all relevant facts.. It does not follow that changes to the manner in which a taxpayer's business is carried on, will necessarily manifest a change in the actual business carried on by a taxpayer. The outcome of the case is not expected to have significant implications for the operation of the law in this area. | Agency | The Commissioner accepts that the Full Court's conclusion that Enterprises Australia carried on the business of managing the hotel as agent for the taxpayer is an application of the general law of agency to the facts of this case. As the Court observed, there was no evidence of sham or any other matter to suggest that the management agreement could not be regarded as giving effect to the intention of the parties to establish a relationship of principal and agent. | The litigation essentially involves the application of established principles to particular facts and the outcome of the case is not expected to have significant implications for the Commissioner's Rulings on the same business test, Taxation Rulings TR 1999/9 and TR 2007/2.

Administrative treatment:
Implications on current Public Rulings & Determinations | None.

Legislative references: Income Assessment Tax Act 1936 (Cth) 80A 80E Income Assessment Tax Act 1997 165-10 165-13 165-210
Case references: Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation [1971] HCA 17 124 CLR 97 71 ATC 4101 2 ATR 312 International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co [1958] HCA 16 100 CLR 644 32 ALJR 160 J Hammond Investments Pty Ltd v Federal Commissioner of Taxation (1977) 31 FLR 349 7 ATR 633 77 ATC 4311 South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541 177 ALR 611
Subject references: whether prior year losses deductible application of 'same business test' question of fact whether applicant carried on the same business before and after the relevant test time