Court Decisions
Same business test
06.03.2009
The Full Federal Court has held that a loss company was carrying on the same business before and after a disqualifying change in the beneficial ownership of its shares and was, therefore, entitled to a deduction for its losses (Lilyvale Hotel Pty Ltd v FCT [2009] FCAFC 21). The decision in this case reverses a decision of Stone J at first instance.
Briefly, the taxpayer company owned a hotel and before the disqualifying change in its shareholdings the hotel was carried on by an agent, ANA Enterprises Australia Pty Ltd (“Enterprises Australia”). After the change the company carried on the business without an agent. Stone J considered that Enterprises Australia was carrying on the hotel business before the change in ownership, not the taxpayer. The approach of Stone J was decisively rejected by the Full Federal Court.
In a joint judgement, Edmonds and Graham JJ said that 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 taxpayer company’s account did not necessarily mean that the “agency” was such that its activities must be attributed to the taxpayer company (as Stone J concluded), but if the legal relationship thereby established was indeed one of agency, why not? That did not mean that Enterprises Australia’s business was the taxpayer company’s business. Nor did it put in issue the proposition that what business the taxpayer company carried on before the share sale was a question of fact, the answer to which depended on the characterisation of the activities in which the taxpayer company was actually engaged. But, if the activities of Enterprises Australia in managing the hotel were carried out as agent for and on behalf of the taxpayer company, these activities should not be excluded from consideration in the characterisation of the taxpayer company’s business before the share sale.
Edmonds and Graham JJ said that Stone J fell into error in concluding that in answering the “same business test” one had to have regard to the management of the business. The fact that at one stage the taxpayer company 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 was a distinction without a difference.
Perram J (the other member of the Court) said it was true in a sense that Enterprises Australia did operate the hotel but that operation was not its own business. The business it conducted for itself (as opposed to the business it conducted for the taxpayer company) was the business of providing management services to the taxpayer company. A person does not cease to carry out an activity because he or she carries out the activity through an agent. The whole point of the law of agency involves the attribution of the activities in fact carried out by one person to the legal account of another. His Honour accepted that the use of the word “agent” in an agreement is not necessarily conclusive of the matter. There may be cases where the evidence shows that some other arrangement is intended besides that which lawyers might contemplate by the word “agent”. However, there was no evidence to that effect in the present case.
