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LILYVALE HOTEL PTY LTD v FC of T

Judges:
Edmonds J
Graham J
Perram J

Court:
Full Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2009] FCAFC 21

Judgment date: 6 March 2009

Edmonds and Graham JJ

Introduction

1. This is an appeal from a judge of this Court affirming an objection decision of the respondent that disallowed an objection by the appellant against the respondent ' s disallowance of a deduction claimed by the appellant in returning its taxable income for the 15 month period from 1 January 2002 to 31 March 2003 (in lieu of the year ended 30 June 2003).

2. The deduction claimed and disallowed was for past losses amounting to $ 10,579,458.

3. The basis of the respondent ' s disallowance of the deduction claimed, and the objection lodged by the appellant, was that the appellant did not satisfy the " same business test " : ss 165-13 and 165-210 of the Income Tax Assessment Act 1997 (Cth) ( " the 1997 Act " ), it being common ground that the appellant could not satisfy the continuity of ownership test: s 165-12 and Subdiv 165-D of the 1997 Act, by reason of the sale of all the shares in the appellant to Reco Harbour Grand Pte Ltd ( " Reco " ), a company owned by the Government of Singapore Investment Corporation Pte Ltd ( ' GIC ' ) in August 2002.

4. The primary judge concluded that the business carried on by the appellant 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. Consequently, the primary judge dismissed the application and affirmed the respondent ' s objection decision.

Statutory context and history

5. During the 2003 year of income, Subdivs 165-A and 165-E of the 1997 Act relevantly provided:

" Division 165 - Income tax consequences of changing ownership or control of a company

…

Subdivision 165 A - Deducting tax losses of earlier income years

…

Operative provisions

165-10 To deduct a tax loss

  • A company cannot deduct a * tax loss unless either:
    • (a) it meets the conditions in section 165-12 (which is about the company maintaining the same owners); or
    • Note: See section 165-215 for a special alternative to these conditions.
    • (b) it meets the condition in section 165-13 (which is about the company carrying on the same business).
  • Note: In the case of a listed public company or its 100 % subsidiary, Subdivision 166-A modifies how this Subdivision applies, unless the company chooses otherwise.

165-12 Company must maintain the same owners

  • Ownership test period
  • (1) In determining whether section 165-10 prevents a company from deducting a * tax loss, the ownership test period is the period from the start of the * loss year to the end of the income year.

  • ATC 9451

    Voting power
  • (2) There must be persons who had * more than 50 % of the voting power in the company at all times during the * ownership test period.
  • Note: See section 165-150 to work out who had more than 50 % of the voting power.
  • Rights to dividends
  • (3) There must be persons who had rights to * more than 50 % of the company ' s dividends at all times during the * ownership test period.
  • Note: See section 165-155 to work out who had rights to more than 50 % of the company ' s dividends.
  • Rights to capital distributions
  • (4) There must be persons who had rights to * more than 50 % of the company ' s capital distributions at all times during the * ownership test period.
  • Note: See section 165-160 to work out who had rights to more than 50 % of the company ' s capital distributions.

…

165-13 Alternatively, company must carry on same business

  • (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.
  • For the same business test: see Subdivision 165-E.
  • …

Subdivision 165-E - The same business test

165-210 The test

  • (1) The 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.
  • (2) However, the company does not satisfy the * same business test if, at any time during the * same business test period, it * derives assessable income from:
    • (a) a * business of a kind that it did not carry on before the * test time; or
    • (b) a transaction of a kind that it had not entered into in the course of its business operations before the * test time.
  • (3) The company also does not satisfy the * same business test if, before the * test time, it:
    • (a) started to carry on a * business it had not previously carried on; or
    • (b) in the course of its business operations, entered into a transaction of a kind that it had not previously entered into;

    and did so for the purpose, or for purposes including the purpose, of being taken to have carried on throughout the * same business test period the same business as it carried on immediately before the test time.

  • (4) So far as the * same business test is applied for the purpose of Subdivision 165-B (which is about working out the taxable income and * tax loss for the income year of change of ownership or control), the company also does not satisfy the test if, at any time during the * same business test period, it incurs expenditure:
    • (a) in carrying on a * business of a kind that it did not carry on before the * test time; or
    • (b) as a result of a transaction of a kind that it had not entered into in the course of its business operations before the test time. "

6.

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The precursor to s 165-210 of the 1997 Act was s 80E of the Income Tax Assessment Act 1936 (Cth) ( " the 1936 Act " ), introduced into that Act by Act No. 103 of 1965. Section 80E of the 1936 Act was introduced as a " safety net " to overcome the harsh consequences of the application of s 80A (which had been introduced the previous year to deny the deductibility of carry forward losses unless there was a requisite continuity of beneficial ownership of shares in the loss company) where there was a takeover of a company for reasons unassociated with its carry forward tax losses. This policy is acknowledged in the Treasurer ' s Second Reading Speech to Income Tax Assessment Bill 1965 which became Act No. 103 of 1965:

" The final matter covered by the Bill is income tax deductions for company losses. Honourable Members will recall that in October last year, the income tax law was amended to provide a counter to the buying-up of shares in companies with accumulated losses deductible for income tax purposes so that the purchasing company could divert its income to the loss company. The diversion of the income in this way resulted in the purchasing company escaping tax on income up to an amount equal to the unrecouped losses incurred by the loss company in the seven years prior to the year of income.

Under the legislation introduced last October, losses of a previous year are not, for 1965-66 and subsequent years, allowable as deductions against the income of a year of income of any company unless there is found to be, during both years, a beneficial ownership by the same shareholders of shares in the company that carry at least 40 per cent of the voting and dividend rights and 40 per cent of entitlements to distributions of capital in the event of the company being wound up.

It is proposed to retain this basic principle but to modify its application in a number of ways.

One amendment proposed will ensure that a major, or even a total, change in the shareholdings of a company will not operate to disturb a deduction for a prior year loss incurred by the company if, at all times in the year of income in which the deduction may be claimed, the company is carrying on the same business as it carried on immediately prior to the change in its shareholdings. For this purpose, a company is not to be treated as qualifying for the deduction if, after the change in its shareholdings occurred, it begins to carry on a business, or enters into transactions, of a kind that it did not carry on or enter into before the change occurred.

The Government considers that this amendment will satisfactorily meet cases of mergers and takeovers of companies that are carried out for sound economic purposes and with which there is not associated any transfer of profitable business from one company to another so that income which would otherwise be taxed is derived free of tax . " (Emphasis added)

7. It is also acknowledged in the reasons for judgment of Gibbs J in
Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation 71 ATC 4101 ; (1971) 124 CLR 97 at 105 where his Honour said:

" The relevant sections of the Act show an intention on the part of the legislature to impose, in the case of companies, a special restriction on the ordinary right of a taxpayer to treat losses incurred in previous years as a deduction from income. The company cannot take the losses into account if there has been a change in the beneficial ownership, of its shares or of the shares in the company of which it is a subsidiary, of the kind mentioned in s. 80A or s. 80C. 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 . " (Emphasis added)

8.

ATC 9453

This is no doubt what led the appellant to submit:

" The present is a paradigm example of the case which it was the policy of sec 165-210, and before it sec 80E of the 1936 Act, to relieve from the consequences of a change in the shareholding in the company. "

Factual context

9. The relevant primary facts were not in dispute. Indeed, the appellant did not dispute any of the findings of primary fact in the judgment appealed from, " but [ did ] rely on some additional uncontested facts, and challenge [ d ] some of the factual conclusions reached " .

10. The appellant is a company incorporated and resident in Australia. It was a subsidiary of ANA Holding Pty Ltd which, in turn, is wholly owned by All Nippon Airways Co Ltd ( " ANA Co " ), a Japanese resident company. Before August 2002 the shares in the appellant were held by ANA Holding Pty Ltd and ANA Co.

11. The appellant owned the leasehold estate in the land known as No. 176 Cumberland Street, The Rocks, Sydney on which it constructed a building to be used as a hotel ( " the hotel " ) originally named the ANA Hotel Sydney and later the ANA Harbour Grand Hotel. It is now known as the Shangri-La Hotel.

12. The lease commenced on 30 April 1993 and the hotel commenced operation in September 1992.

13. On 18 December 1989 the appellant and ANA Enterprises Australia Pty Limited ( " Enterprises Australia " ), an Australian resident company, entered into an agreement entitled " Operating and Management Agreement " ( " the Management Agreement " ) pursuant to which Enterprises Australia was to operate and manage the hotel for a term of 20 years.

14. In brief, the primary judge found, at [ 7 ] , that the Management Agreement provided 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. "

15. On the same date as it entered into the Management Agreement, the appellant also entered into a Licence Agreement with ANA Enterprises Ltd ( " ANA Enterprises " ), a Japanese resident company. This agreement entitled the appellant, 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, for which ANA Enterprises was to receive a licence fee based on gross revenue and a " System Service Charge " .

The Management Agreement

16. The primary judge referred to various provisions of the Management Agreement in which the appellant was referred to as " the Owner " and Enterprises Australia as " the Operating Company " .

17. Article I headed " Appointment of the Operating Company " provided:

" Section 1. The Site

The site on which the Hotel (as hereinafter defined) will be constructed is at No. [ 176 ] Cumberland Street, The Rocks, Sydney, NSW 2000 Australia.

Section 2. The Hotel

The attached drawings indicate the hotel property and areas which come under the jurisdiction of the Operating Company (being hereinafter collectively referred to as ' the Hotel ' ) during the term of this Agreement.

Section 3. Commencement date of Commercial Operations

The commencement date of commercial operations of the Hotel will be September 1 st , 1992.

Section 4. Term

The term of this Agreement commences from the date of this Agreement and ends on the 31 st December of the 20 th calendar year following the calendar year in which

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commercial operations of the Hotel commences. "

18. Article II headed " Services of the Operating Company " contained four sections. The preamble and Section 1 provided:

" 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.

It is understood that, subject only to any express limitation which may be contained in this Agreement, the Operating Company shall have exclusive control and discretion in the management and operation of the Hotel. Subject to the provisions of this Agreement, the Operating Company shall, in rendering its services hereunder, be free from interruption or disturbance, and the Owner will at its own expense undertake and prosecute any appropriate action, judicial or otherwise, to assure such freedom to the Operating Company.

In taking any action pursuant to this Agreement, the Operating Company will be acting only as agent for the Owner and nothing in this Agreement shall be construed as creating a partnership or joint venture or any other relationship between the parties except that of principal and agent. [ Emphasis added ]

Section 1. Operation and Management of the Hotel

The Owner hereby entrusts the Operation and Management of the Hotel to the Operating Company, and the Operating company is hereby authorized to do or cause to be done the following in the name and for the account of the owner;

  • (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, 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.
  • (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 4 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 courses of business, except, as otherwise provided in this Agreement.

    Without impairing the generality of the foregoing, the above negotiation and execution shall include the negotiation and execution shall include the negotiation and execution of labor contract with a union or unions representing employees of the Hotel.

  • ATC 9455

    (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 and contracting for advertising and promotional programs for the Hotel.
  • (m) The taking of an 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.

To supervise, direct and control the operation and management of the Hotel, the Operating Company shall appoint a General Manager of the Hotel and assign him to the Hotel. The schedule of his assignment to the Hotel shall be determined by the Operating Company with prior written notice to the Owner, and the salary and expenses to be incurred by his assignment to the Hotel shall be borne by the Hotel [ sic ] based on the standard of the Operating Company. The Operating Company shall reserve the right to pay the salary, payroll tax and related expenses, and such expenses, shall be subsequently reimbursed by the Hotel [ sic ] as operating expenses. The General Manager shall at all times remain an employee of the Operating Company and shall be subject to the exclusive control and direction of the Operating Company. "

19. Section 2 of Article II relevantly provided:

" With the exception of the General Manager, key staff(s) and certain other personnel assigned by the Operating Company but who have not executed an employment contract with the Owner, all employees of the Hotel, regardless of whether hired by the Operating Company or assigned to work at the Hotel by the Operating Company, shall at all times be and remain employees of the Owner, subject to the exercise by the General Manager of his duties and responsibilities under this Agreement. "

20. Article III headed ' Compensation of the Operating Company ' relevantly provided:

" Section 1. Remunerations

Basic Management Fee - The Owner shall pay to the Operating Company a Basic Management Fee equal to TWO percent (2 % ) of the Total Revenue of the Hotel.

Incentive Fee - In addition to the Basic Management Fee, the Owner shall pay to the Operating Company an Incentive Fee of FIVE percent (5 % ) of the Gross Operating Profit of the Hotel. "

21. The terms " Total Revenue " and " Gross Operating Profit " were relevantly defined in Section 4 of Article III as follows:

" Total Revenue - The words Total Revenue ' as used in this Agreement shall mean all revenues and income of any kind derived directly or indirectly from the Hotel or from the use thereof, including rental or other payments from lessees, sublessees and concessionaires.

Gross Operating Profit - the words ' Gross Operating Profit ' as used in this Agreement shall mean the excess of Total Revenue over all costs and expenses of maintaining, conducting and supervising the operation of the Hotel ( ' Operating Expenses ' ), which are properly attributable to the period under consideration under the Operating Company ' s system of accounting … "

22. The operating expenses that Enterprises Australia was entitled to incur on behalf of the appellant 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 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. These

ATC 9456

expenses were brought to account in determining the Gross Operating Profit.

23. Article IV headed " General Covenants of the Parties " relevantly provided:

" Section 7. Operating Bank Accounts

All funds derived from the operation of the Hotel shall be received by the Operating Company for the account of the Owner and shall be deposited in an operating account in such bank or banks as the Owner may designate to the Hotel after consultation with the Operating Company . The Operating Company shall be under no liability or responsibility for any loss resulting from the insolvency of the bank or banks in which such funds are deposited. The Operating Company shall deposit and maintain in the operating account such portion of said funds as may be required to pay the ordinary current costs and expenses of operating the Hotel, including a reasonable reserve for such purpose. All checks for the withdrawal of funds from such accounts shall bear the joint signatures of the General Manager and Comptroller of the Hotel or their respective immediate assistants.

The Operating Company shall at the request of the Owner transfer to a bank account nominated by the Owner any funds in the operating account of the Hotel which are surplus to the fund requirements of the Hotel. For the purpose of this clause, any funds in the operating account which are in excess, in the Operating Company ' s reasonable opinion, of anticipated or contingent expenditure requirements of the Hotel ' s operations shall be considered surplus. " (Emphasis added)

Management of the hotel before the share sale

24. The primary judge accepted the evidence about the operation and management of the hotel given by Mr Nigro, who was the 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.

25. The primary judge made a number of findings in relation to Mr Nigro ' s employment with ANA Enterprises and subsequently ANA Hotels Co Ltd, not Enterprises Australia; the respective responsibilities of Mr Nigro and Mr Hopcroft; their respective participations in decision-making; lines of reporting; the evidence of Mr Nigro and Mr Hopcroft in relation to hotel marketing; the position and role of the ANA Group ' s owner ' s representative at the hotel, Mr Koichi Inokuma; the position and role of the executive assistant to the General Manager, Mr Hideo (Henry) Suzuki; the hotel ' s services and systems and the hotel ' s manuals.

26. None of these findings appeared to play a significant role in the primary judge ' s ultimate conclusion nor were they relied on by either party in their respective submissions on the hearing of the appeal. The primary judge did find at [ 38 ] that the limited role of the appellant in the day-to-day management of the hotel was reflected in the accounts and this was initially relied on by senior counsel for the respondent on the hearing of the appeal as being reflective of the proper characterisation of the appellant ' s business. However, for the reasons detailed below, the argument and any consequence drawn therefrom is flawed.

Management of the hotel after the share sale

27. Following completion of the share sale on 30 August 2002, the Management Agreement with Enterprises Australia was terminated and until the re-branding to the Shangri-La Hotel after 1 July 2003, the hotel was operated and managed by the appellant under the pre-sale name of the ANA Harbour Grand. The primary judge referred to and accepted the evidence of Mr Nigro that the services provided to the customers of the hotel were identical to the services provided before the sale and 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; the staffing generally was unchanged and the hotel retained its focus on the Japanese market. This is what Mr Tang had referred to as a policy of " seamless transition " .

28. The primary judge was satisfied that Mr Tang ' s seamless transition was achieved; accepted that a guest in the hotel or indeed the hotel ' s employees, would not have discerned any material difference between the way the

ATC 9457

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. Indeed, the primary judge accepted the appellant ' s evidence comparing the operation of the hotel after the sale (with that before the sale) and adopted the appellant ' s summary in the following terms:
  • " (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. "

29. The primary judge found that the continuity of operation after the share sale was in marked contrast to the changes that occurred after 1 July 2003 when branding and operational changes came into effect. But this falls outside the period with which we are concerned.

The primary judge ' s reasoning and conclusion

30. The critical parts of the primary judge ' s reasoning process are to be found at [ 70 ] - [ 72 ] of the reasons:

  • " 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 [ (1998) 193 CLR 605 ] (see [ 62 ] above), could not be said to be the conduct of Lilyvale.

  • ATC 9458

    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 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. "

31. The primary judge concluded that the business carried on by the appellant 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.

32. The primary judge ' s reasoning process manifest in the paragraphs extracted in [ 30 ] above, seems to us to involve a characterisation of the appellant ' s business before and after the share sale by reference to the activities of Enterprises Australia before and after the share sale rather than by reference to the activities of the appellant itself. There could be a number of reasons for this to which reference will be made in the analysis below.

The submissions on appeal

33. At the forefront of the appellant ' s submissions was that at all relevant times its business was to be properly characterised as being that of the owner and operator of the hotel - deriving revenue from its guests and profit from its operations; and that at all relevant times its business was ' the same ' in the sense of requiring that it should be identical and not merely similar or of the same kind: Avondale Motors at 104, 105, per Gibbs J.

34. The appellant put its case on two alternative foundations:

  • (1) The uncontested evidence showed that the Management Agreement was disregarded in the conduct of the hotel business, which was conducted by the appellant alone.
  • (2) Insofar as regard is to be had to the Management Agreement, the role of Enterprises Australia was that of agent for the appellant as its principal, not (as in
    International Harvester Co of Australia Pty Ltd v Carrigan ' s Hazeldene Pastoral Co (1958) 100 CLR 644 ) distributor representative, and the agreement accurately described the intended relationship between the parties.

35. As to the first foundation, the respondent submitted that this was a " new case " which had not been run below. If the reasons of the primary judge can be taken as a guide, there seems to be some force in the respondent ' s submission. Senior counsel for the appellant made little, if any, reference to it in his oral submissions and on the view we take in relation to the alternative foundation, it is unnecessary to say anything further about it.

36. In relation to the alternative foundation, the appellant made the following submissions:

" There is no controversy that the Management Agreement provided for what was to be done by the ' Operating Company ' (Enterprises Australia) pursuant to its terms to be done ' only as agent for the Owner ' and ' in the name and for the account of the Owner. ' The Owner was to ' entrust the operation and management of the hotel to the Operating Company, ' and was to receive reports of the activities of the latter; staff were to be selected and employed by the Operating company, but were to be employees of the Owner, not of the Operating Company, and the Operating Company was to have no responsibility for their actions. Leases and contracts were to be made, and concessions granted, in the name of the Owner (who owned the premises), by the Operating Company as agent.

That these things were to be done - and could only be done - by the Owner makes it clear that so far as they were to be done by the Operating Company, they could only be

ATC 9459

done by it as agent (clothed with ' an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties ' ) of the Owner. The Operating Company ' s concern to be classed as an agent rather than as a partner or joint venturer does not detract from that conclusion. As manager alone but not agent, it could not have done what was provided for by the agreement. In the ' business world ' the only effective relationship provided for was that of principal and agent - not of distributor, nor of manager divested of agency.

The relationships of agent and manager are not mutually exclusive. To the contrary, an effective management contract (as distinct from an advisory role) requires that so far as the business is conducted by the manager, it is conducted as agent; else the relationship is truly that of licensor and licensee of the business assets, and the income is that of the putative ' manager ' . That was not the case here: the Respondent maintains, as a fundamental premise of his assessment, that the income arising from the operation of the hotel is the income of the Appellant. "

37. The respondent submitted that:

  • " (1) The application of the statutory test, namely, whether the appellant was carrying on the same business, is a question of fact.
  • (2) The issue of whether there was an agency arrangement between the appellant and Enterprises Australia, and the nature of that agency arrangement, is not determinative of the application of the statutory test.
  • (3) In any event, to the extent that the management agreement could be regarded as creating a legal relationship of ' agency ' , the character of that relationship in the particular circumstances is not such that the actions of Enterprises Australia may be attributed to the appellant. In the present case, although the Management Agreement provides the label of ' agency ' , it contemplates a clear division between the ownership of the property, and the operation of the business.
  • (4) The appellant has not demonstrated any error in the approach taken by her Honour. The issue below being one of fact and degree on which the trial judge had the advantage of hearing the evidence in its entirety, it is not open to the appellant simply ' to treat the appeal as if it were a new trial on the evidence ' . There is no basis for disturbing the finding of fact made by her Honour. "

Analysis

38. It lay at the heart of the respondent ' s case, both before the primary judge (who accepted the argument) and on appeal, that because Enterprises Australia managed the hotel prior to the share sale but not after, the appellant did not carry on the same business before the share sale as it did afterwards. Inherent in this is the respondent ' s contention, seemingly accepted by the primary judge, that prior to the share sale, the appellant ' s business consisted of -

  • • 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.

Hence the primary judge ' s comment at [ 71 ] that the appellant ' 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 … could not be said to be the conduct of Lilyvale " .

39.

ATC 9460

There are a number of responses to this and we deal with each of these below.

40. First, the four activities listed in [ 38 ] above, which the Commissioner submitted, both before the primary judge and on the hearing of the appeal, were exhaustive of the business of the appellant before the share sale, were not revenue producing activities. The respondent ' s senior counsel accepted as much. As the appellant derived revenue in excess of $ 60 million from its ordinary activities in the year ended 31 December 2001 and in excess of $ 72.7 million for the 15 month period ended 31 March 2003, it may be asked from what activities did these revenues arise. Senior counsel ' s (for the respondent) answer to this question, at least before the share sale, was to say from the activities of Enterprises Australia. At one level that is correct, but at the relevant level, that is, in characterising the business activities of the appellant at a particular point in time or over a relevant period, it is tantamount to saying that the millions of dollars of revenue reported each year by BHP Billiton Plc are sourced not in its business activities, but in the activities of its employees and others that it engages to manage those businesses.

41. Second, the primary judge ' s apparent acceptance of the respondent ' s submission that the financial accounts of the appellant for the relevant periods reflect the appellant ' s limited role in the day-to-day management of the hotel prior to the share sale (see [ 26 ] above), does not withstand scrutiny when one appreciates that the accounts to which reference was made were monthly management accounts. The full audited financial accounts for the year ended 31 December 2001 disclose revenue from ordinary activities of $ 60,038,338 and describe the appellant ' s principal activity in the following terms:

" The company ' s principal activity in the course of the financial year was the operation of the ANA Hotel Sydney. During the financial year there was no significant change in the nature of that activity. "

The full audited accounts for the 15 month period ended 31 March 2003 disclose revenue from ordinary activities of $ 72,779,822 and describe the appellant ' s principal activities in the following terms:

" The company ' s principal activity in the course of the financial period was the investment in and operation of the ANA Harbour Grand Hotel in Sydney. During the financial period there was no significant change in the nature of that activity. "

None of the financial statements indicate that the appellant derived revenue from any source other than the operation of the hotel.

42. Third, the primary judge ' s rejection of the invitation, under the banner of " agency " , to attribute the activities of Enterprises Australia to the appellant - to deem them to be the appellant ' s activities, relies almost totally on an observation by the High Court in International Harvester at 652:

" 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)

In our opinion, in the absence of a contention of sham, of which there is none, there could be no suggestion that the agency created by the Management Agreement was not one which was to have full force and effect at law, rather than being, as was held in International Harvester , no more than business nomenclature to describe a distributor representative. Nothing was said by Finn J in
South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 to which the primary judge also referred, to cast doubt on this. Indeed, at 646 Finn J said:

" 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.

ATC 9461

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. "

43. Fourth, it may be accepted, as a matter of general principle, that the fact that Enterprises Australia carried out its obligations under the Management Agreement on the appellant ' s account does not necessarily mean that the " agency " was such that its activities must be attributed to the appellant as the primary judge concluded at [ 68 ] , but if the legal relationship thereby established was indeed one of agency, why not? That does not mean as the primary judge observed, that Enterprises Australia ' s business was the appellant ' s business. Nor does it put in issue the proposition that what business the appellant carried on before the share sale is a question of fact, the answer to which depends on the characterisation of the activities in which the appellant was actually engaged - " the real nature of the taxpayer ' s business " : per Sheppard J in
J Hammond Investments Pty Ltd v Federal Commissioner of Taxation 77 ATC 4311 ; (1977) 31 FLR 349 at 357. But if the activities of Enterprises Australia in managing the hotel are carried out as agent for and on behalf of the appellant, we are unable to comprehend why these activities should be excluded from consideration in the characterisation of the appellant ' s business before the share sale. On the contrary, they must be taken into account.

Summary and conclusion

44. Where the question is whether a particular inference should be drawn from proved facts, an appellate court has the right and duty to decide the question for itself (per Gibbs A-CJ, Jacobs and Murphy JJ in
Warren v Coombes (1979) 142 CLR 531 at 541). As their Honours said at 551:

" [ T ] he established principles are … that in general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge. In deciding what is the proper inference to be drawn, the appellate court will give respect and weight to the conclusion of the trial judge, but, once having reached its own conclusion, will not shrink from giving effect to it. … "

45. The critical issue for determination in this case was whether throughout the same business test period (i.e. 1 January 2002 to 31 March 2003) the appellant carried on the same business as it carried on immediately before the test time (on the appellant ' s case, 8 August 2002 and on the respondent ' s case, 30 August 2002).

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.

47. In respect of a similar provision in the 1936 Act (s 80E, to which reference has already been made), Gibbs J, as his Honour then was, said in Avondale Motors at 106:

" It does not … follow that a business will not be the same because there have been some changes in the way in which it is carried on … "

48.

ATC 9462

Earlier in his Honour ' s reasons for judgment he said at 105:

" The meaning of the phrase " same as " , like that of any other ambiguous expression, depends on the context in which it appears. In my opinion in the context of the section the words " same as " import identity and not merely similarity and this is so even though the legislature might have expressed the same meaning by a different form of words. "

49. Earlier still, at 104, his Honour said:

" If s. 80E(1) (c) requires that the business carried on throughout the whole of the year of income should be identical with that carried on immediately before the change in ownership of the shares, i.e., that it should be the same business rather than the same kind of business, it is clear that the taxpayer cannot meet that test. Before 15th March 1968 the taxpayer carried on the business of dealer in motor parts and accessories at three different premises in conjunction with a motor dealer having franchises for certain vehicles. After that date it carried on the same kind of business but under a different name, at different places, with different directors and employees, with different stock and plant and in conjunction with a motor dealer having different franchises. "

50. In the instant case, the appellant did not move to a different location or locations to conduct its hotel business. It did not, so it would seem, introduce gaming machines or otherwise change the character of the hotel business.

51. In Avondale Motors , the appellant was engaged in a motor vehicles spare parts business. The " before " and " after " nature of " the business " was, unlike the present case, quite different.

52. This was a case where changes in the way in which the business was carried on did not render it a different business.

53. The appeal should be allowed. The respondent must pay the appellant ' s costs both before the primary judge and on the appeal, as taxed or agreed.


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