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The Full Federal Court (Edmonds, Graham and Perram JJ) has upheld the taxpayer's appeal from the decision of Stone J, who had 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 Stone J accepted that the same business was being carried on both before and after the change, her Honour held that it was not being carried on by the taxpayer before the change of ownership.

In allowing the appeal, Edmonds and Graham JJ said at para 46:

"In our opinion, the leaned primary judge fell into error in concluding that in answering the ‘same business test’ one had to have regard to the management of the business. In our opinion, the fact that at one stage the appellant conducted its hotel business without the intervention of a hotel management group and at another did so with the assistance of such a hotel management group is a distinction without a difference. In our opinion, the appellant correctly described the business which it carried on as that of ‘owning and operating ...[a] hotel to derive revenue from its guests and profits from its operation’. The execution of the management of the hotel at different times in different ways had no bearing upon the identification of the business which the appellant carried on."

In allowing the appeal, Perram J said at para 56:

"... it is true in a sense that Enterprises Australia did operate the hotel but that operation was not its own business. The business it conducted for itself (as opposed to the business it conducted for Lilyvale) was the business of providing management services to Lilyvale. As to the latter, a person does not cease to carry out an activity because he or she carries out the activity through an agent. The whole point of the law of agency involves the attribution of the activities in fact carried out by one person to the legal account of another. Were it otherwise, the fact that bus companies employ drivers to operate buses on their behalf would mean that the bus companies are not bus operators, a conclusion which is neither plausible nor palatable."

Lilyvale Hotel Pty Ltd v FCT [2009] FCAFC 21 (Full Federal Court; Edmonds, Graham and Perram JJ; 6 March 2009).

For a copy of the decision, go here.

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