Stone J

Federal Court, Sydney


Judgment date: 10 July 2008

Stone J


1. Overlooking Sydney Harbour, in the area known as the Rocks, is a hotel originally named the ANA Hotel Sydney, and later the ANA Harbour Grand Hotel. It is now known as the Shangri-La Hotel. The hotel was constructed by the applicant, Lilyvale Hotel Pty Limited on land leased for 99 years from the Sydney Cove Redevelopment Authority (now the Sydney Harbour Foreshore Authority). The lease commenced on 30 April 1993 and the hotel commenced operations in September 1992. Pursuant to an agreement with Lilyvale ("Management Agreement"), the hotel was initially operated and managed by ANA Enterprises Australia Pty Limited ("Enterprises Australia"), an Australian resident company.

2. In 2002 Reco Harbour Grand Pte Ltd ("Reco"), a company owned by the Government of Singapore Investment Corporation Pte Ltd ("GIC"), acquired, either directly or indirectly, all the shares in Lilyvale. The Management Agreement with Enterprises Australia was terminated and for a short period after the sale the hotel was operated and managed by Lilyvale under the pre-sale name of the ANA Harbour Grand. Eventually, however, the new owners changed the name of the hotel to the Shangri-La and appointed Mr Michael Cottan as General Manager.

This proceeding

3. The question for determination in this proceeding is whether, in the income period ending on 31 March 2003, Lilyvale carried on the same business as it carried on immediately before August 2002, the critical date, being either 8 or 30 August, according to the applicant and the respondent respectively. An affirmative answer to this question would mean that Lilyvale would be entitled to claim prior year tax losses as a deduction in its income tax return for the 2003 income year. In passing, I note that the income tax assessment for Lilyvale for the income period ending on 31 March 2003 covers the 15 month period from 1 January 2002 to 31 March 2003. This is a practical adjustment that allows for continuity of taxation despite the former owner of Lilyvale accounting to 31 December and the new owners having a financial year ending 31 March. It has no implication for the issue presently under consideration.

4. In its 2003 tax return Lilyvale showed, before deduction of losses, a taxable income of $10,579,458. It claimed a deduction for carried forward losses of the same amount, the effect being to reduce its taxable income to nil. On 1 November 2005 the Commissioner issued a notice of assessment disallowing the whole of the deduction for the tax losses. Lilyvale lodged an objection to this assessment on 9 December 2005. The respondent disallowed the objection and consequently, on 11 July 2006, Lilyvale appealed the objection decision to this Court

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under s 14ZZ(a) of the Taxation Administration Act 1953 (Cth).

5. The present application is made by way of appeal under Pt IVC of the Taxation Administration Act 1953 (Cth). There is no issue between the parties as to the quantum of the losses or the deductibility of the outgoings which gave rise to them. Similarly there is no issue as to the amount of income derived for the 2003 year. The only issue is the deductibility of past losses amounting to $10,579,458.

The applicant

6. Lilyvale is a company incorporated and resident in Australia. It was a subsidiary of ANA Holdings Pty Ltd which, in turn, is wholly owned by All Nippon Airways Co Ltd ("ANA Co"), a Japanese resident company. These companies formed part of the ANA group of companies. Before 8 August 2002 the shares in Lilyvale were held by ANA Holdings Pty Ltd and ANA Co.

The Management Agreement

7. On 18 December 1989 Lilyvale and Enterprises Australia entered into the Management Agreement pursuant to which Enterprises Australia was to operate and manage the hotel for a term of 20 years. In brief, it provided, inter alia, that Enterprises Australia would,

  • (a) supervise, direct and control the management and operation of the hotel including sales and marketing and for that purpose would employ a General Manager;
  • (b) supervise and control the performance of all services and everything necessary for the proper operation of the hotel; and
  • (c) be entitled to a management fee based on the gross revenue and gross operating profit of the hotel.

A more detailed examination of the Management Agreement shows that Enterprises Australia was given comprehensive control of the operation and management of the hotel.

8. The Management Agreement referred to Lilyvale as the "Owner" and Enterprises Australia as the "Operating Company". It recited the experience of Enterprises Australia "in planning, technical assistance, management and operation of international standard hotels in various countries ..." and stated that Lilyvale "desires to enter into this Agreement in order to entrust the operation and management" of the hotel to Enterprises Australia. Article II provided that:

"Throughout the term of this Agreement, the Operating Company will supervise, direct and control the management and operation of the Hotel, including Sales and Marketing, and will supervise and control the performance of all services and do or cause to be done all things reasonably necessary for the proper operation of the Hotel."

9. Article II also provided that Enterprises Australia will be acting "only as agent for the Owner" and expressly excluded a partnership or joint-venture or "any other relationship between the parties except that of principal and agent". It also stated, however, that, "subject only to any express limitation which may be contained in this Agreement", Enterprises Australia was to have "exclusive control and discretion in the management and operation of the Hotel".

10. Pursuant to section 1 of Article II, the Operating Company was authorised, "in the name and for the account of the Owner", to do the following:

  • (a) the selection, employment and termination of employment, supervision, direction, training and assigning of the duties of all employees engaged in the operation of the Hotel. The selection, terms of employment and termination thereof, including rates of compensation, and the supervision, direction, training and assignment of duties of all employees, shall be the duty and responsibility of, and shall be determined or controlled solely by the Operating Company.
  • (b) The establishment of all prices, price schedules, rates and rate schedules.
  • (c) The making of such repairs, or alterations and decorations of the Hotel as the Operating Company may deem reasonably necessary for the proper maintenance and operation thereof.
  • (d) The negotiation and execution of leases and concessions for store, health club and office spaces in the Hotel.

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    (e) The leasing and letting of rooms or space in the Hotel not referred to in sub-paragraph (d) above, or other accommodations in the Hotel in the usual course of business, and the establishment of rates and rate schedules therefore.
  • (f) The obtaining and granting of such concessions and privileges, including, but not limited to cigar stands, news stands, taxicabs and automobile garages, as the Operating Company may deem reasonably necessary or desirable in connection with the operation of the Hotel.
  • (g) The supervision and control of the activities of tenants, concessionaires and holders of privileges and their employees within the Hotel only.
  • (h) The installation of suitable books of control and account to be kept in accordance with the Uniform System of Accounts for Hotels referred to in Section Four of Article III of this Agreement, with the exceptions provided in this Agreement.
  • (i) The granting and limiting of the credit of patrons of the Hotel, including agreements with credit card organizations on terms reasonably arranged by the Operating Company.
  • (j) The negotiation and execution of contracts reasonably necessary or desirable in connection with the operation of the Hotel in the usual course of business, except as otherwise provided in this Agreement.
  • (k) The purchasing of such inventories, provisions, supplies, furnishings, fixtures and equipment as the Operating Company may deem reasonably necessary in order to maintain and operate the Hotel properly.


  • (l) The planning and preparation of contracting for advertising and promotional programs for the Hotel.
  • (m) The taking of any action at law or in equity in the name of the Operating Company or in the name of the Owner which the Operating Company shall deem reasonably necessary and proper in connection with the Operation of the Hotel; and
  • (n) Generally, the performance of all acts reasonably necessary in connection with the operation of the Hotel in an efficient and proper manner.

11. In addition to these responsibilities the Management Agreement provided for Enterprises Australia to employ a General Manager who would remain its employee and be under its exclusive control and direction. For reasons that were never explained, the General Manager, Mr Art Nigro, was initially employed by ANA Enterprises and then by ANA Hotels Co Ltd; see [26] below.

12. The Agreement provided for Enterprises Australia to determine the schedule of the General Manager's assignment to the hotel. His salary and expenses, which were to be based on the standard of Enterprises Australia, were to be borne by Lilyvale; however Enterprises Australia was entitled to pay the salary, payroll tax and related expenses, and to be reimbursed subsequently. The Agreement provided that the General Manager was to remain an employee of Enterprises Australia and was subject to its exclusive control and direction. In addition to the General Manager, Enterprises Australia also employed Mr Hiroshi Miura, the Executive Chef and Mr Hideo Suzuki, the Executive Assistant to the General Manager for the relevant period from 1 January 2001 to 30 August 2002.

13. With these exceptions all employees of the hotel, "regardless of whether hired by the Operating Company or assigned to work at the Hotel by the Operating Company" were employees of Lilyvale although "subject to the exercise by the General Manager of his duties and responsibilities" under the Management Agreement. Notwithstanding this provision these employees were to be assigned to the hotel by Enterprises Australia or its subsidiaries and affiliated companies. Their salaries and expenses were also to be based on the standards of Enterprises Australia and reimbursed to it by Lilyvale.

14. The operating expenses that Enterprises Australia was entitled to recover from Lilyvale included not only employee salaries and associated expenses but also the cost of all food and beverages used at the hotel, administrative and office costs, repair and maintenance of the

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hotel, insurance premiums, all taxes and charges, legal and other professional fees related to the operation of the hotel, costs of technical consultants as well as marketing and out-of-pocket expenses. The operating expenses did not include depreciation and amortisation, interest incurred by Lilyvale, rent of the premises, furniture and equipment, real and personal property taxes, premiums for property damage insurance and business interruption insurance, the costs of structural additions or modifications, extraordinary repairs, maintenance and capital improvements or the administrative and overhead expenses of Lilyvale's home-office.

15. The Management Agreement contained detailed provisions relating to the calculation of the management fee and the operating expenses. On 31 May 1996 the fee payable under the Management Agreement was changed to 13% of the annual gross operating profit after deduction of the annual licence fee. Each year Enterprises Australia had to submit a Capital Expenditure Budget to Lilyvale for approval but the approval was not to be unreasonably withheld or delayed. Enterprises Australia also had to submit to Lilyvale a monthly profit and loss statement as well as an annual budget.

16. Compared to the responsibilities of Enterprises Australia, Lilyvale's role was mainly high level supervision and responsibility for capital expenses and finance. In broad terms, Lilyvale had to provide and maintain the premises as well as the furniture and fittings of the hotel, fund the operation of the hotel and pay the agreed management and licence fees to Enterprises Australia. It was obliged to maintain full ownership of the hotel building, its furniture, furnishing and equipment including operating equipment, and was responsible for capital improvements.

17. Lilyvale had a right to inspect the hotel "with appropriate advance notice at all reasonable times" during the term of the Management Agreement. It was also entitled to an annual audit of the books and accounts of the hotel by an auditor appointed by it with the consent of Enterprises Australia. Lilyvale and Enterprises Australia were to schedule regular monthly meetings to discuss all aspects of the hotel's performance. There was also provision for Enterprises Australia, at Lilyvale's request, to advise Lilyvale about the major policies and procedures affecting the conduct of the business at the hotel.

18. An indication of the extent to which Lilyvale entrusted the operation and management of the hotel to Enterprises Australia can be seen in section 3 of Article IV which states:

"Upon completion of the Hotel, transfer of the control of the Hotel to the Operating Company from the Owner shall be effected in writing ..."

The Licence Agreement

19. On the same date as it entered into the Management Agreement, Lilyvale also entered into a Licence Agreement with ANA Enterprises Ltd ("ANA Enterprises"), a Japanese resident company in Australia. The agreement entitled Lilyvale, in connection with the operations of the hotel, to use the name, ANA Hotels, the triangular logo mark of the ANA Group and the name "Unkai" in relation to the Japanese restaurant operated within the hotel. Article III of the Licence stated that ANA Enterprises would provide:

"... the following collective services to the Hotel, such services to be collectively known as ANA Hotels System Services (hereinafter called "the System Services"):

  • (a) To provide reservation services through the ABLE. Computer System and ANA Hotels sales offices.
  • (b) To plan, arrange and execute joint promotional events and programs among members of ANA Hotels.
  • (c) To provide other services as may be available from time to time for the members of ANA Hotels."

20. Under the agreement ANA Enterprises was to receive a licence fee based on gross revenue and a System Service Charge of A$1 per room per night, adjusted upward by 5% annually after the completion of commercial operation for one full calendar year. This was amended in 1996 to 1% of Rooms Revenue. On 28 September 2001 the Licence Agreement was novated so as to substitute ANA Hotels Co Ltd ("ANA Hotels"), a Japanese resident company

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being part of the ANA group, for ANA Enterprises as licensor.

The share sale

21. On or about 8 August 2002 each of the Lilyvale shareholders entered into an agreement with Reco for the sale of all its shares. The sale of the hotel had been marketed on the basis that it would be sold with vacant possession; that is, not subject to any existing management. Exhibited to Mr Tang's affidavit was a letter dated 26 June 2002 from Sonnenblick-Goldman Company, which specified that if the purchaser wished to have the use of ANA group intellectual property after the sale it would need to negotiate a separate agreement to that effect.

22. On 8 August 2002, in a letter to the Sydney Harbour Foreshore Authority, the solicitors for Reco informed the Authority of the proposed sale and stated there would be a short-term arrangement permitting Lilyvale to continue operating "the property" using the name "ANA Harbour Grand Hotel". The letter also advised that ANA Hotels would not be involved in the management of the hotel but that the then General Manager, Mr Nigro, would be retained as General Manager of the hotel by Lilyvale. Pending completion of the share sale agreements on 30 August 2002, each seller was required to refrain from certain actions in relation to Lilyvale including: admitting new members; altering the share capital; attempting to liquidate the company; encumbering the shares; attempting to alter the company's constitution; and declaring any dividends or making any other distribution.

23. On completion of the share sale the directors of Lilyvale resigned and new directors were appointed. The Management Agreement (with Enterprises Australia) and the Licence Agreement (with ANA Hotels) were terminated however, pursuant to a new Licence and Services Agreement with ANA Hotels, Lilyvale retained the right to use "ANA Intellectual Property" for 12 months (including the trademarks, ANA Hotels and ANA Harbour Grand Hotel and the Unkai name). The agreement required Lilyvale to ensure that the hotel's services were consistent with "the reputation and prestige of the ANA Group".

24. From 1 July 2003, pursuant to agreements made between Lilyvale and Shangri-La Hotels Pty Ltd on 26 March 2003, the hotel operated under the name Shangri-La Hotel Sydney. Since that time the ANA trademarks and name have not been used in connection with the hotel.

Management of the hotel before the share sale

25. Evidence about the operation and management of the hotel was given by Mr Nigro, who was General Manager from June 1995 to April 2003, Mr David Hopcroft, Hotel Manager from 1999 to 2004 and Mr Alan Yew Kuen Tang, Senior Vice President of GIC Real Estate Pte Ltd, the real estate subsidiary of the Government of Singapore Investment Corporation Pte Ltd. The evidence each gave was consistent with that of the others and, although all three were cross-examined, they did not significantly depart from the evidence given in their respective affidavits. Except where expressly indicated, I accept their evidence. The following account of the operation and management of the hotel is taken from their evidence.

26. On 12 April 1995 Mr Nigro entered into a contract of employment with ANA Enterprises. The agreement referred to a number of hotels in the chain of ANA hotels and stated that ANA Enterprises had offered Mr Nigro the position of General Manager of one of the hotels owned and/or managed by it, as selected by it. Mr Nigro took up the position as General Manager of the hotel. He said in evidence that he was aware of the Management Agreement between Lilyvale and Enterprises Australia and understood that he was assigned to the hotel to work on behalf of Enterprises Australia pursuant to an agreement between it and ANA Enterprises. Mr Nigro gave evidence that in July 2001 for reasons that were not known to him, his employment contract was "transferred" to ANA Hotels. The novated contract stated that Mr Nigro would become the "Regional Director of Operations and General Manager of the Hotel" and would remain an employee of ANA Hotels. It provided, however, that he could be seconded to ANA Enterprises to perform his duties under the contract.

27. Mr Nigro's contract with ANA Hotels was initially for a period of eighteen months

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commencing on 1 July 2001. Mr Nigro stated that the terms of his employment with ANA Hotels were the same "in all material respects" as with ANA Enterprises. While the terms of the later contract do not contain the same detail as is to be found in the contract with ANA Enterprises, I accept that Mr Nigro is correct for all practical purposes.

28. As General Manager Mr Nigro had "full executive responsibility for all strategic and managerial aspects of the Hotel". In his management of the hotel Mr Nigro was assisted by an executive committee of seven senior executives. At fortnightly meetings the executive committee considered the full range of operational and management issues. Both Mr Nigro and Mr Hopcroft said that most of the significant decisions affecting the hotel were made by consensus in consultation with the executive committee, however they agreed that, in the absence of consensus, it was Mr Nigro who would make the decision. The minutes of the executive committee meetings and various operational and management reports, including revenue and financial reports, prepared by Mr Nigro and other members of the senior staff were sent to the ANA Group.

29. In his capacity as Hotel Manager Mr Hopcroft had operational, financial and some strategic responsibilities which, he said, remained unchanged during his tenure. He had "day to day executive control of the operation of the Hotel" and "was responsible for supervising operational staff, implementing service strategies, monitoring guest relations, maintaining service standards and ensuring that Hotel policies were observed". All except five departmental heads reported to Mr Hopcroft on a daily basis. Mr Hopcroft also participated in financial management of the hotel and was involved in the budgetary and inventory control. He also participated in strategic decisions, particularly through his membership of the executive committee. Mr Hopcroft confirmed Mr Nigro's account of the outsourcing of certain of the hotel services.

Hotel marketing

30. Both Mr Nigro and Mr Hopcroft commented on the sales and marketing of the hotel. Mr Hopcroft observed that the hotel had a larger sales and marketing team than other hotels of comparable size. He attributed this to the fact that the hotel was not part of a worldwide network of hotels, such as the Shangri-La group of hotels. He also noted that the hotel's marketing strategies were focused on the Japanese market which was the result of the natural synergies between the ANA group's airline, All Nippon Airways, and hotel businesses. By this he meant that the group's airline and hotel businesses were able to offer package deals for flights and accommodation.

31. Over the time that Mr Hopcroft was at the hotel the proportion of Japanese customers declined so that by 2002 the percentage of Japanese customers was about 27% whereas in 1995 it was about 50%. Mr Hopcroft said:

"There were a number of reasons why the number of Japanese customers decreased during this period, including the downturn in the Japanese economy, the aftermath of the terrorist attacks on the United States of America in September 2001 and the termination of the code-sharing arrangement between All Nippon Airways and Ansett in 2001 when Ansett collapsed. The latter factor had a significant impact because the number of flights available from Japan to Sydney was dramatically reduced. In this regard, I was frequently told by Japanese tour operators ... that they could not book suitable flights for their clients."

32. It was clear from Mr Nigro's evidence that he was concerned about the hotel's reliance on the Japanese market. He said that in 1997 or 1998 he decided that the name of the hotel should be changed for marketing reasons. Up to that point it had been called the ANA Hotel which Mr Nigro thought lacked individuality and "was not a meaningful name to customers other than those in the Japanese market". Mr Nigro would have preferred the name to be changed to Harbour Grand Hotel Sydney, not only because the name would reflect the hotel's geographical location and its status as a "grand hotel", but he also thought that removing ANA from the name would lessen the hotel's focus on Japanese customers. He said, however, that he did not think the ANA Group would agree to remove ANA from the name so he suggested that the name be changed to ANA Harbour Grand Hotel. The change was made at the end

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of 2000 and the hotel commenced operating under its new name on 1 January 2001. A trade mark was registered in respect of the new name but Mr Nigro was not able to recall why the new trade mark was registered in Lilyvale's name rather than in the name of another company within the ANA group.

Reporting lines

33. Mr Hopcroft reported to Mr Nigro who reported to the Director of Overseas Operations of ANA Hotels International, who was based in Tokyo. Initially this was Mr Ryozo Oya and at the time of the sale it was Mr Yasuhiro Nakamura. Mr Nigro said that he involved Mr Oya and Mr Nakamura in "the hiring of key staff such as the Hotel Manager, Human Resources Manager, Financial Controller or Director of Marketing" and kept them advised of all significant policy decisions as well as submitting monthly financial results and other management reports. Mr Nigro said that the Head Office of ANA Hotels International was not involved in the management of the hotel other than in respect of capital expenditure approvals.

The owner's representative

34. Before the share sale, the ANA Group had an owner's representative at the hotel. From 1999 the position was held by Mr Koichi Inokuma whose previous position was General Manager in Australia of All Nippon Airways. As the owner's representative, Mr Inokuma's main role was to monitor and make recommendations in relation to capital expenditure. He was also involved in welcoming and entertaining Japanese guests. According to Mr Nigro:

"Mr Inokuma had no influence over the management of the Hotel. ... He was not a member of the Executive Committee, nor did he receive minutes of Executive Committee meetings. He was not involved in any operational or strategic decision making. I did not report to Mr Inokuma and he had no power to override or even influence my decisions or the decisions of other executives in relation to the management or operation of the Hotel."

35. Mr Nigro's understanding was that Mr Inokuma was a director of Lilyvale from 22 July 1999 until he resigned in August 2002. Mr Hopcroft also commented on Mr Inokuma's lack of involvement in the management of the hotel:

"From my position as Hotel Manager I cannot recall any occasion on which Mr Inokuma became involved in any aspect of the day to day management of the Hotel. However, because capital works had to be approved by Head Office and the money required to carry them out came from Head Office, I was aware that any recommendations for capital expenditure were directed through Mr Inokuma as the owner's representative. I was also aware that Mr Inokuma and Mr Nigro usually met each month and occasionally I was invited to attend those meetings. I am also aware that Mr Inokuma entertained important Japanese guests at the Hotel from time to time."

36. The views expressed by Mr Nigro and Mr Hopcroft were supported by various documents tendered to the Court which, as the Commissioner submitted, showed both the separate functions of Lilyvale and Enterprises Australia, and Mr Nigro's control and management of the hotel. They included memoranda concerning the car park privileges and entertainment discounts to be granted to Mr Inokuma, a letter concerning complaints from Mr Inokuma about restrictions on concessions available to him in the hotel, and a memorandum seeking Mr Inokuma's opinion about pay increases for management.

37. As mentioned earlier (see [16] above) Lilyvale was responsible for all alterations and capital improvements. This division of responsibility was strictly adhered to as an e-mail dated 18 April 2001 to department heads from Mr Nigro shows:

"Pls be advised that just because you have a capex project listed in the budget, it does not mean that Mr. Inokuma will approve it. We can not order capex items until he has signed the purchase request. Therefore, no matter how many times we talk about buying some capex item, we can not buy it until we have his approval. Capex funds belong to the owner not the hotel management. Mr. Inokuma alone has final approval. Pls abide by this policy at all times."


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The limited role of Lilyvale in the day-to-day management of the hotel is also reflected in its accounts. For instance, the first entry in the profit and loss statement for the month of November 2001 is, "gross operating profit" against which is shown the actual amount of $2,051,812.67. Under the heading, "Owner's admin expenses" appears the amount of $11,346.59 for "Salaries & Related". It is clear that this amount does not include the salaries of the approximately 500 employees of Lilyvale who worked in the hotel. The Commissioner submitted that:

"The significance of the Profit and Loss Statements is that they identify the financial operations of Lilyvale from Lilyvale's perspective ie., without regard to the day to day operations of the Hotel (in which Lilyvale plays no part) ..."

The Commissioner also noted, in his written submissions, that this approach is also reflected in the Balance Sheets.

Executive assistant to the general manager

39. From 2001 Mr Nigro had an executive assistant, Mr Hideo (Henry) Suzuki who had been assigned to the hotel by the ANA Group. According to Mr Nigro, Mr Suzuki had no involvement with operational or strategic matters. The focus of Mr Suzuki's responsibilities was the hotel's relationships with its guests. Mr Nigro described Mr Suzuki as the "Japanese face" of the hotel and said:

"Occasionally he acted as a "go-between" with some of the Japanese staff, Human Resources, the Hotel Manager and me, but most of his time was spent interacting with the Japanese community, Japanese tour operators and Japanese guests."

Hotel's services and systems

40. In his affidavit, Mr Nigro listed the services provided by the hotel during his time as General Manager. They included all the accommodation, restaurant and function services expected of a five-star hotel including business centre services, car parking, laundry and dry cleaning services, and so on. Mr Nigro said that a small proportion of the services were outsourced to external contractors, generally, where it would be more cost-effective. He added:

"For example, I recall that some housekeeping, cleaning, security, payroll and car park management services were outsourced during my time at the Hotel. There were some services, such as outside and inside plant maintenance, window cleaning, waste removal and advertising services that were outsourced even before I started working at the Hotel and continued to be outsourced until the time that I left the Hotel in May 2003."

41. Mr Nigro gave examples of the outsourcing contracts in relation to housekeeping, cleaning and kitchen cleaning services, payroll and car park management services. In the main, the outsourcing arrangements that operated while Mr Nigro was the General Manager were still in operation when he left the hotel. The same was true of the marketing and loyalty programs. Other systems and procedures which remained in place during the whole of Mr Nigro's time at the hotel were the business operating system, the global reservation system, and the Fidelio system software which is used by many hotel chains in front office and accounting administration.

Hotel manuals

42. During his time at the hotel, Mr Nigro developed a General Managers Operating Procedures Manual designed to provide guidance to general managers within the ANA group on all management issues and to outline the proper format for reports and marketing plans. He said that the manual was in use throughout the period he was General Manager of the hotel and was not amended in any significant way during this time. In addition to the General Manager's Operating Manual there was an extensive array of manuals (approximately 55 manuals) used in the hotel ranging from maintenance, engineering and fire safety to housekeeping, food and beverage control and hotel minimum standards. Hotel manuals were issued by the Director of Operations, ANA Hotels International and remained the property of ANA Enterprises. In cross-examination Mr Nigro said that all of the manuals which were described as pertaining to the ANA Grand Harbour Hotel would have been used during his time as General Manager. Mr Nigro also identified a document which he

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described as the Sydney Policy Standards and Procedures Manual. This was the hotel's domestic policy and procedural manual which, Mr Nigro said, most departments would have had access to and would have had a copy in their offices.

43. In his affidavit Mr Nigro said that the hotel's operating procedures were governed by a series of operating manuals which including the Standards Manual, the General Manager's Operating Procedures Manual, the Accounting Manual, the Human Resources Manual and the Safety and Security Manual. Mr Nigro added:

"I also developed a significant internal Policy and Procedure manual during my tenure at the Hotel and this formed the basis of many of the Hotel's operating policies and procedures."

Mr Nigro went on to explain how he drafted many of the other manuals during his time as General Manager of the hotel and that these manuals were in daily use by the hotel staff.

44. I accept the Commissioner's submission that, in the absence of any contrary agreement, the intellectual property in those manuals would have vested in Enterprises Australia as they were developed by the General Manager in the course of his employment. These manuals were neither owned by, nor licensed to, Lilyvale and the Share Sale Agreement specifically excluded them from being the property of Lilyvale.

Lilyvale's directors

45. Mr Nigro's evidence was that, neither before the sale, when the directors of Lilyvale were appointed by the ANA group, nor after it, when they were appointed by the GIC Group, did the directors have any involvement in the management of the hotel.

Management of the hotel after the share sale

46. In anticipation of the sale of the hotel, Mr Nigro's contract with ANA Hotels was amended by agreement on 5 December 2001 and, pursuant to those amendments, the contract was terminated with effect from 30 August 2002, the date of completion of the Lilyvale Share Sale Agreement. On the same date Mr Nigro entered into an agreement with Lilyvale to continue as General Manager of the hotel until February 2003. The period was later extended to 30 April 2003, when it was terminated by agreement.

47. Mr Nigro described the conversations that he had with Mr Tang when the issue of the sale of the hotel first arose. He agreed that he would be happy to stay on as General Manager during a transitional phase, but said that he would like to keep the whole of the executive team together. Mr Tang agreed to that request. Shortly before the sale of the hotel Mr Tang told Mr Nigro that the purchasers had decided to maintain the ANA signage until the new management company was appointed. This was to ensure that the change in ownership caused as little disruption as possible. According to Mr Nigro, Mr Tang said:

"We have been discussing with ANA the possibility of using its intellectual property so that we can avoid having to change name twice in such a short period.

ANA has agreed in principle and I have decided that we are going to adopt a policy of "seamless transition" until the new management company is appointed."

48. After the hotel was sold Mr Nigro reported to Mr Tang, to whom the minutes of the executive committee and the operational and management reports referred to in [15] above were also sent, however Mr Nigro and Mr Hopcroft both said that the operation and management of the hotel continued as before. In particular he noted that there were no significant changes to the role or composition of the executive committee; the duties and responsibilities of the hotel executives, the department heads and operational staff remained the same; the executive committee continued to meet fortnightly, and all other management meetings continued as had previously been the case. Mr Nigro also said that, until the re-branding to the Shangri-La Hotel, the services provided to the customers of the hotel were identical to the services provided before the sale and that there was nothing in the presentation of the hotel, the services it provided or the price of its services which suggested any change of ownership.

49. While the staffing generally was unchanged, the new owners appointed Mr David Gibson of Jones Lang LaSalle as their representative. The hotel retained its focus on

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the Japanese market and a new Japanese Director of Guest Relations, Mr Shokichi (Sho) Suzuki, was employed to replace Mr Henry Suzuki who was relocated to Japan. Mr Sho Suzuki's function was to manage guest relationships and to retain a "Japanese face" to the hotel. His role was not materially different from that of his predecessor.

50. The continuity of operation after the sale is in marked contrast to the changes that occurred after 1 July 2003 when branding and operational changes came into effect. A new General Manager was appointed. Hotel menus and beverage lists changed. Staff uniforms were changed and the service, procedure and employee manuals used under the previous management were replaced by Shangri-La service manuals. Performance standards for operational staff were changed and a new performance appraisal process was implemented. There was a new web site and the reservation system previously used was replaced by the Pegasus system which was used by all Shangri-La hotels. The loyalty programs specific to ANA ceased to operate and new loyalty programs specific to the Shangri-La group were introduced with effect from July 2003.

51. Mr Tang explained why, from the purchaser's point of view, it had been decided to continue operating the hotel under the ANA brand for some time after the sale despite his view that it lacked strength in the marketplace. Mr Tang said that from his experience in previous transactions, he believed that the process of attracting, tendering, interviewing and selecting the right management company could take up to a year to finalise. He rejected the option of appointing a temporary or interim new management company as he felt that a short term re-branding followed by the final re-branding would create uncertainty and confusion in the marketplace. Mr Nigro agreed with this assessment which led Mr Tang to adopt what he described as "the seamless transition" policy, by which he meant "an acquisition process whereby the Hotel customers would not be aware of any changes to the hotel until it was re-branded under the banner of the new management company".

Issues and relevant legislation

52. Part 2-5, Division 36 of the Income Tax Assessment Act 1997 (Cth) contains the statutory provisions regulating the calculation of tax losses for an income year, the deduction of tax losses and the special rules about tax losses. Division 165 of that Act deals with the income-tax consequences of changing ownership or control of a company. Section 165-10 provides that a company cannot deduct a tax loss unless it meets the continuity of ownership test in s 165-12 or satisfies the same business test in s 165-13.

53. The continuity of ownership test requires that more than 50% of the voting power, rights to dividends and rights to capital distributions be continuously held by the same person or persons for the ownership test period. The ownership test period commences with the year of income in which the tax loss arises and continues to the end of the income year in which the loss is to be claimed as a deduction; s 165-12. It is not necessary here to explain the tests by which one determines if the 50% condition has been met, as both parties accept that it was not met here. It is not in contention that, because of its change of ownership, Lilyvale cannot meet the test in s 165-12.

54. Lilyvale contends however that it satisfies the "same business test" in s 165-13. The section provides as follows:

  • "(1) If the company fails to meet a condition in section 165-12 (which is about the company maintaining the same owners), it must instead meet the conditions in this section.
  • (2) There must be some period (the continuity period ) that satisfies these conditions:
    • (a) it must start at the start of the ownership test period;
    • (b) if the period were the ownership test period, each of the conditions in section 165-12 would be satisfied.
  • (3) The company must satisfy the same business test for the income year (the same business test period ). Apply the test to the business that the company carried on immediately before the time (the test time ) when the continuity period ends."


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Subject to qualifications which are not relevant here, s 165-210 provides that a company satisfies the same business test if throughout the same business test period it carries on the same business as it carried on immediately before the test time. The same business test period is the income year in which the tax loss is claimed. There is no dispute between the parties that the same business test period in this case is the period from 1 January 2002 to 31 March 2003. There is, however, disagreement about the test time , which is the point at which the continuity of ownership test failed to be satisfied. Lilyvale submits that this occurred on 8 August 2002, when the share sale agreements were entered into. Lilyvale's submission is premised on its view that the beneficial interest in the shares passed to the purchasers on 8 August 2002.

56. The respondent contends that the continuity of ownership test failed to be satisfied only on 30 August 2002 when the share sale was completed. In support of its view the respondent pointed to the fact that the purchaser had to meet certain conditions precedent before the share vendors were obliged to complete. Until those conditions were met, the respondent submitted, the beneficial interest in the shares did not pass.

57. While both parties made detailed submissions in support of their respective views, I do not believe that it is necessary for me to decide this issue. If Lilyvale is correct, the issue here is whether it carried on the same business from 1 January 2002 to 31 March 2003 as it carried on immediately before 8 August 2002. If the respondent is correct the latter date is 30 August 2002. The difference would only be significant if the business carried on by Lilyvale changed within the period from 8 August to 30 August. The evidence does not suggest that this is so.

58. The same business test also requires that during the same business test period the company must not derive assessable income from a business of a kind that it did not carry on before the test time; s 165-210(2). During that period it also must not derive assessable income from a transaction of a kind that it had not entered into in the course of its business operations before the test time; s 165-210(2).

Submissions and reasoning

59. Whether Lilyvale carried on the same business from 1 January 2002 to 31 March 2003 as it did immediately before either 8 or 30 August 2002 requires careful consideration of Lilyvale's activities and responsibilities both before and after the critical date in August 2002. The question is one of fact;
Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation 71 ATC 4101; (1971) 124 CLR 97 per Gibbs J at 104. There are two elements to the concept of a taxpayer "carrying on the same business" and both must be addressed. First, it is necessary to have a clear understanding of the concept of carrying on a business, taking into account the relevant statutory and commercial context. Then, having established that before the critical date the taxpayer is carrying on a business and the nature or characterisation of that business, it is necessary to ask if the taxpayer carried on the same business after the critical date.

60. In Avondale Gibbs J rejected a submission that the word "same" in the phrase "same business" meant "similar" or "analogous" rather than "identical". His Honour accepted that the meaning, as with any ambiguous phrase, depends on context and held that in the context of s 80E(1) of the Income Tax Assessment Act 1936-1968 (Cth), a predecessor of the provision presently under consideration, the meaning was that of "identity". Gibbs J, at 105, found support for his view in a consideration of the purpose of the legislation:

"This restriction is imposed to prevent persons from profiting by the acquisition of control of a company for the sole purpose of claiming its accrued losses as a tax deduction. However the restriction if imposed absolutely would lead to injustice in cases where a company, notwithstanding substantial changes in the ownership of its shares, continued to carry on the same business. No injustice would, in my opinion, result from a refusal to treat an accrued loss as a tax deduction where the company after the change carried on a different business, although one of a similar kind."

Lilyvale therefore needs to show that the business it carried on after the share sale was

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identical to the business that it carried on in the relevant period before the share sale.

61. There was no issue as to the fact that Lilyvale was carrying on a business before the share sale. The parties do differ, however, as to their characterisation of that business. In submissions, Mr Slater QC, who appeared for Lilyvale, characterised its business, both before and after the sale, as carrying on "the business of hotelier or innkeeper at the premises in the Rocks". He submitted that in carrying on its business Lilyvale "provided accommodation for guests, provided restaurant facilities and meals for guests, and food and beverages in bars and so forth, convention facilities, parking facilities, laundry facilities and all the other things that a hotel provides to its customers or guests ... with three exceptions, it employed all the staff engaged in that enterprise". In contrast, the Commissioner submitted that Lilyvale's business consisted of the following:

  • • the provision of the physical asset ie., the Hotel;
  • • the maintenance of an operating bank account in the name of Lilyvale Hotel Pty Ltd in which [Enterprises Australia] deposited receipts and from which [Enterprises Australia] made payments of operating expenses, and from which Lilyvale transferred excess amounts from time to time;
  • • the procurement of [Enterprises Australia], pursuant to the Management Agreement, to operate and manage the hotel but with a veto on capital expenditure;
  • • the procurement of [ANA Enterprises] (later ANA Hotels), pursuant to the Licence Agreement, to allow [Enterprises Australia] to operate and manage the hotel using the trademarks associated with ANA and the ANA Hotels Systems Services.

62. Whether a person is carrying on a business and the nature of that business involves a consideration of the activities in which that person is involved. In
Hope v Bathurst City Council (1980) 144 CLR 1, the High Court considered questions of law which raised the issue of whether the activities of the appellant amounted to "carrying on the business of grazing". The New South Wales Court of Appeal had decided, "as a matter of fact", that the appellant's use of his land, "albeit for commercial purposes and for the purpose of profit, was not significant enough to bring it within the scope of the common or general meaning of either of the words "business" or "industry"." Mason J, with whom Gibbs and Stephen JJ agreed, held at 8-9, that the expression, carrying on the business of grazing, denotes "grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis". A similar approach was adopted in
Federal Commissioner of Taxation v Murry 98 ATC 4585; (1998) 193 CLR 605, where Gaudron, McHugh, Gummow and Hayne JJ said at 626:

"A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions."

63. Similarly the question whether a company is carrying on the same business before and after a certain date involves a consideration of the activities of that company before and after the critical date.

64. In this case the question requires an enquiry into Lilyvale's activities before and after the critical date in August. The applicant has argued that because the Management Agreement provided that Enterprises Australia acted as agent for Lilyvale, the activities of Enterprises Australia could be attributed to Lilyvale so that the business of operating and managing the hotel constituted by the activities of Enterprises Australia was the business in which Lilyvale was engaged. Consequently, it was submitted, the absence of any change in the way in which the hotel was managed by Lilyvale after the change (Mr Tang's "seamless transition") indicates that Lilyvale's operation and management of the hotel after the share sale was the same business as it had carried on before the sale.

65. This submission hinges on the legal characterisation of the relationship between Lilyvale and Enterprises Australia. It is an invitation, under the banner of "agency", to attribute the activities of Enterprises Australia to Lilyvale - to deem them to be Lilyvale's activities. The characterisation of the

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relationship in the Management Agreement as one of agency does not, however, lead inevitably to this conclusion. In
International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644 at 652 the High Court observed:

"Agency is a word used in the law to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties. But in the business world its significance is by no means thus restricted." [emphasis added]

66. In the Management Agreement the context in which the concept of agency is invoked indicates that the parties were as much concerned to exclude the possibility of their relationship being characterised as a joint venture or partnership as to invoke the concept of agency; see [9] above. There is no reason why they should not do that. As Finn J stated in
South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 at 645-646, in the course of setting out detailed propositions about the nature of agency:

"It is legitimate for parties to avoid the 'unwanted consequences' of a particular category of legal relationship by seeking to cast it in a form that takes it outside that category of relationship:
Colbron v St Bees Island Pty Ltd (1995) 56 FCR 303 at 314. But whether or not they are successful in achieving that end does not depend simply upon whether, in an express provision of their agreement, they attribute or deny to their relationship a particular legal character - be this, for example, employer and employee:
Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385; principal and principal or principal and agent:
Board of Trade v Hammond Elevator Co, above; or partners:
Ex parte Delhasse;
Re Megevand (1878) 7 Ch D 511. The parties cannot by the mere device of labelling, no matter how genuinely intentioned, either confer a particular legal character on a relationship that it does not possess or deny it a character that it does possess:
Ex parte Delhasse, above, at 532; see 2A Corpus Juris Secundum, 'Agency', §7; see also the observations of Lord Denning in
Massey v Crown Life Insurance Co quoted in the Australian Mutual Provident Society case, above, at 389."

67. His Honour continued:

"Save where an express labelling provision is shown to be a sham, the provision itself (as a manifestation of the parties' intent) must be given its proper weight in relation to the rest of their agreement and such other relevant circumstances as evidence the true character of their relationship. This may lead to its being disregarded entirely:
Ex parte Delhasse, above;
Board of Trade v Hammond Elevator Co, above; or to its being given full force and effect:
Australian Mutual Provident Society v Chaplin, above. And such will depend upon whether, given the actual incidents and content of the relationship (that is, 'the factual relation') to which the parties have consented, they have consented 'to a state of fact upon which the law imposes the consequences which result from agency': Branwhite's case, above, at 587; Restatement, Second, Agency, §1 comment b."

68. The fact that Enterprises Australia carried out its obligations under the Management Agreement on Lilyvale's account does not mean that the "agency" was such that its activities must be attributed to Lilyvale, nor that its business was Lilyvale's business. The question of what business Lilyvale carried on before the sale is a question of fact, the answer to which depends on the characterisation of the activities in which Lilyvale was actually engaged (i.e. what Sheppard J in
J Hammond Investments Pty Ltd v Federal Commissioner of Taxation 77 ATC 4311; (1977) 31 FLR 349 at 357 referred to as "the real nature of the taxpayer's business"), not on its legal relationship to Enterprises Australia and its activities.

69. I am satisfied from the evidence before me that Mr Tang's "seamless transition" was achieved; I accept that a guest in the hotel or indeed the hotel's employees, would not have discerned any material difference between the way the hotel was operated and managed before and after August 2002 until about the time when the name of the hotel was changed to the Shangri-La Hotel. The written submissions for

ATC 8494

Lilyvale summarised the applicant's evidence comparing the operation of the hotel after the sale. I accept this evidence and adopt the summary which is as follows:
  • (a) the hotel business was conducted by the Applicant under the same name;
  • (b) the same get-up and style, trademarks and presentation were used;
  • (c) the management team (including in particular the general manager) continued unchanged;
  • (d) the staff engaged in the conduct of the business continued unchanged except for normal turnover, which was lower in the Applicant's case than was normal in the industry;
  • (e) the contracts for the provision of services by external contractors continued unchanged;
  • (f) the services and facilities provided by the Applicant in the conduct of the hotel business were unchanged;
  • (g) the hotel was marketed in the same way, to the same markets and using the same agents and representatives;
  • (h) the signature restaurant (Unkai) and other restaurants continued to operate in the same way;
  • (i) the Applicant continued to derive the (assessable) income from the provision of the same hotel services and facilities;
  • (j) the same manuals and procedures continued to be used under licence from the same (ANA) group;
  • (k) the same computer management and reservation systems continued to be used, obtained from the same independent suppliers;
  • (l) the same reports continued to be supplied to the ultimate shareholders in the Applicant (albeit that the identity of the shareholders changed);
  • (m) the owner's representative (whose identity changed from time to time) continued to perform the same role;
  • (n) a "guest relationship manager" was retained to present a "Japanese face" to the hotel guests;
  • (o) the management of the hotel was to the same extent (and with no greater degree of supervision) entrusted to the general manager and the executive committee; it "remained the same throughout the entire period."
  • (p) in the period from the test time in August 2002 to April 2003, the Applicant undertook and achieved a "seamless transition," whereby it carried on its business in the same fashion as it had done before August 2002, such that no change resulting from the change in ownership was perceptible to its customers.

70. The same business test requires however, not merely that the same business be carried on, but that it be carried on by the taxpayer, in this case Lilyvale. I accept that after the share sale Lilyvale carried on the business of managing the hotel. The critical question remaining is whether the business that Lilyvale carried on before the share sale is properly characterised as the business of managing the hotel in the same way that the business it carried on after the share sale can be characterised.

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 (see [62] above), could not be said to be the conduct of Lilyvale.

72. As mentioned above, in the pre-sale period the Management Agreement between Lilyvale and Enterprises Australia provided that Enterprises Australia would operate and manage the hotel for a period of 20 years and would also be responsible for sales and marketing. After the sale Enterprises Australia was no longer involved with the hotel, and yet the operation of the hotel continued seamlessly. It must be assumed that Lilyvale had stepped into the shoes of Enterprises Australia. To the

ATC 8495

extent that the tasks that Enterprises Australia performed before the sale, continued to be carried out after the sale, the evidence indicates that they were carried out by Lilyvale.


73. In my view the business carried on by Lilyvale in the relevant period before the share sale was not the same as the business that it carried on in the relevant period after the sale. It follows that the present application must be dismissed and the objection decision of the respondent must be affirmed. The applicant must pay the respondent's costs.

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