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The Federal Court (Stone J) has held that the taxpayer, a company that owned a hotel in the Rocks area of Sydney, was not entitled to a deduction for prior year losses of $10,579,458 after a change of ownership, because it did not satisfy the same business test in s 165-12 ITAA 1997. Prior to the change of ownership, the hotel was being managed by another company (ANA Enterprises Australia Pty Limited) under a management agreement with the taxpayer, but after the change of ownership, the hotel was managed by the taxpayer itself. Although her Honour accepted that the same business was being carried on both before and after the change, it was not being carried on by the taxpayer before the change of ownership.

Her Honour said, at para 71:

"The evidence shows that before the critical date Lilyvale and Enterprises Australia engaged in very different activities. It is true that Lilyvale’s income (on which it was liable to income tax) was sourced from the hotel, however it was the activity of Enterprises Australia that generated that income. Lilyvale’s involvement in the business of the hotel was so distant from the day to day activities of the hotel that, in my view, the course of conduct carried on in the hotel, bearing in mind the notions of continuity and repetition referred to in Federal Commissioner of Taxation v Murry...could not be said to be the conduct of Lilyvale."

Lilyvale Hotel Pty Limited v FCT [2008] FCA 1031 (Federal Court, Stone J, 10 July 2008).

For a copy of the decision, go here

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