Case U105

Members:
Purvis J

Tribunal:
Administrative Appeals Tribunal

Decision date: 5 May 1987.

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R.N. Purvis J. (Presidential Member)

Generally

The issue that warrants consideration in this application for review relates to whether losses incurred by a company in two years whilst it was conducting the business of a restaurant and take-away food shop can be effectively written off, pursuant to the provisions of sec. 80A and 80E of the Income Tax Assessment Act, against income earned in a subsequent year by the same company, its shareholders then being significantly different and its business then described as that of restaurant and bar proprietors.

The factual situation arises out of the shareholder structure of the taxpayer company changing as to one-half thereof between the years of losses and the year of profit and the taxpayer disposing of the goodwill, plant, fittings and stock of the business in which the losses were incurred and entering into another business, be it of a similar nature, from which profits were derived.

The relevant factual situation

The taxpayer was incorporated in 1966, the shareholders then being B as to one-half, and his parents as to the other half. B married in 1968, his wife shortly thereafter taking a transfer to her of the parents' half interest.

The taxpayer conducted the business of a sandwich shop and take-away food bar in Sydney up until 1975 when it sold that business and purchased a combined take-away food shop and restaurant at another location but also in that city. Both B and his wife worked in the business together with five or six part full-time, part casual staff, the number working at any one time depending on the volume of business, the time of day, and the day of the week. Take-away food, hot and cold drinks and confectionery were sold. The restaurant served meals, imposed a minimum charge and did not have a liquor licence. It was situated in the basement of a 10-storey building and had a seating capacity for 80 to 100 people.

The patronage of the shop and restaurant came primarily from office workers and students of a nearby business college; there was also a passing trade. The business was open on six days of a week, 7 a.m. to 7 p.m. weekdays and to 3 p.m. on Saturdays, the latter being primarily for shoppers.

B was well able to manage the business and he had enough expertise to run it on his own, the assistance required being clerical so far as his wife was concerned, a cook, and table and counter attendants.

Further to an agreement reached between B and his then wife and approved pursuant to the provisions of sec. 87 of the Family Law Act, the wife on 25 May 1978 transferred the two ordinary shares in the capital of the taxpayer, then held by her, as to one share to B and the other to a nominee company for B. The shares so transferred represented one-half of the then issued shares in the capital of the taxpayer.

A measurable proportion of the business of the shop and restaurant initially came from employees of a tenant located in the same building as the taxpayer company. The tenant vacated the premises; business declined. Losses were incurred by the taxpayer in each of the 1976 and 1978 financial years in the amounts of $5,526 and $1,129 respectively. At November 1978 a loss was imminent for the 1979 financial year and the lease of the taxpayer's premises, although containing an option, was due to expire. The taxpayer resolved to endeavour to sell the business.

Some time in about November 1978 B became aware of the owner/operator of a restaurant / theatre / conference / seminar / art gallery/shop complex seeking to divest itself of the responsibility of managing and conducting the restaurant / bar / take-away food / confectionery / coffee shop side of the business. A short time before 8 December 1978 B had a preliminary discussion with the person then having the control over the complex. B was led to believe that he had a good chance of being selected as the new operator.

The goodwill, plant, furniture and stock of the business previously carried on by the taxpayer was sold by it, completion taking place on 8 December 1978. B remained at the shop/restaurant for about one week after completion of the sale in order to introduce the purchaser effectively to the business and its customers. The amount received by the taxpayer on sale of its above-mentioned assets was less than had been paid for the same some three years before. A loss resulted on sale of the goodwill. No further fee or amount was received or receivable consequent on the sale.

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Within a short time of the completion of the sale of the shop/restaurant business B spoke with the controller of the complex and with other executives of it. Discussions continued up until about Christmas time 1978 when B was informed that he would be invited to take over the operation. B contacted a solicitor and steps were then taken to ensure the preparation of appropriate documentation.

The complex extended over three floors of the one building. The restaurant there situated served alcoholic beverages and there was also a bar. The staff previously engaged by the owner/operator would have to be taken over or replaced. The peculiarities of the complex had to be explained and mastered.

Between Christmas 1978 and 1 February 1979 B on his own behalf and on behalf of the taxpayer company, in addition to the matters already detailed:

• (a) did all such things as were necessary to have the appropriate liquor licence transferred to himself as licensee;
• (b) attended at the complex frequently in order to familiarise himself with its operation, the frequency of patronage and the likely call upon his experience;
• (c) the venture being "too big for B to handle on his own", made contact with two others, both hoteliers, each of whom had experience in the liquor trade and catering and had funds to invest; the taxpayer did not on the evidence, have itself sufficient funds available with which to conduct the business solely on its own account;
• (d) negotiated with the two other persons referable to the formation of a partnership, the same designed to carry on the business being taken over from the owner/operator and retain the taxpayer as manager for a fee.

The taxpayer did not, other than as above, carry on any relevant business between 8 December 1978 and 31 January 1979.

On and from 1 February 1979 B held the liquor licence, the taxpayer for a fee of $400 per week, managed the restaurant, the bar, the coffee shop, and food outlets and the partnership effectively ran the business as a whole.

The complex facilities were used by theatre-goers and persons attending conferences, seminars and art displays. There was a self-contained restaurant, a bar, a candy bar, a take-away food counter, and other appropriate facilities. There was a catering for seminars, conferences and functions attended by from 40 to 1,000 people. The food provided in the restaurant was extensive, and whilst the theatre patrons were the main customers of the restaurant and bar and shop, people from nearby stores, offices and a university, availed themselves of the same. The liquor bar was open to patrons from one hour before a theatre performance, to one hour after curtain fall.

Conferences and seminars were at least a bi-weekly occurrence.

Thus, consequential upon the carrying into effect of the above arrangements, the taxpayer was, as a partner, responsible for the management of the venture, the business income being derived, and the expenses incurred by the partnership. The management fee was paid by the partnership to the taxpayer, the partnership employed the staff. The profit remaining after deduction of the expenses of running the business, including the management fee paid to the taxpayer, was divided as agreed between the three partners of which the taxpayer was one.

Three redeemable preference shares in the capital of the taxpayer were issued in the 1979 financial year, one to B and one to each of two other individuals.

Statutory provisions

Section 80A(1) of the Income Tax Assessment Act so far as it is relevant to this matter provides:

"(1) Notwithstanding sections 80, 80AAA and 80AA but subject to this section and sections 80B, 80DA and 80E, a loss incurred by a company in a year before the year of income shall not be taken into account for the purposes of section 80, 80AAA or 80AA unless -

• (a) the company satisfies the Commissioner;
• ...

that, at all times during the year of income, shares in the company carrying between them -

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• (c) the right to exercise more than one-half of the voting power in the company;
• (d) the right to receive more than one-half of any dividends that may be paid by the company; and
• (e) the right to receive more than one-half of any distribution of capital of the company,

were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying between them rights of those kinds."

So far as it is relevant, sec. 80E of the Act provides:

"(1) Subject to sub-section (2) where -

• (a) the whole or part of a loss incurred by a taxpayer, being a company, in a year before the year of income would not, but for this section, by reason of a change that has taken place in the beneficial ownership of shares in the company or in any other company, be taken into account for the purposes of section 80, 80AAA or 80AA;
• (b) the first-mentioned company carried on at all times during the year of income the same business as it carried on immediately before the change referred to in paragraph (a) took place; and
• (c) the first-mentioned company did not, at any time during the year of income, derive income from a business of a kind that it did not carry on, or from a transaction of a kind that it had not entered into in the course of its business operations, before the change took place,

sections 80A and 80DA do not prevent the whole of the loss being so taken into account."

Section 80A - change in beneficial ownership

On 25 May 1978 B's wife caused the two ordinary shares then held by her in the issued capital of the taxpayer to be transferred to B and his nominee. The issued capital at that time of the taxpayer was $4 made up of four ordinary shares of $1 each.

During the 1979 financial year three $1 redeemable preference class shares were issued by the taxpayer, one to B and one each to two other persons, neither of whom was B's previous wife.

The issued shares in the taxpayer company in the 1979 financial year carrying between them the rights referred to in sec. 80A were not beneficially owned by persons who at all times during the 1976 and 1978 financial years, beneficially owned shares in the taxpayer, carrying between them such rights.

The fact that the transfer took place pursuant to a maintenance agreement approved under sec. 87 of the Family Law Act does not preclude the operation of sec. 80A. The section applies to the situation the subject of these reasons and decision.

Section 80E - the same business

The continuity of business test has a number of requirements, all of which are cumulative. They are, the carrying on at all times during the year of income of the same business before the change of ownership, no derivation of income at any time during the year of income from a business of a kind that the taxpayer did not carry on before the change and no derivation of any kind during the year of income from a transaction of a kind that it had not entered into in the course of business operations before the change.

It was submitted on behalf of the taxpayer that the business carried on "at all times" in the 1979 financial year and from which the profit was derived was "the same business" as it carried on before the change in beneficial ownership and that it had not derived income in the 1979 year from a business of a kind that it did not carry on in the 1976 and 1978 years, or from a transaction of a kind that it had not entered into in the course of its business operations before the change took place. The Commissioner contended otherwise, relying on the taxpayer's non-compliance with each of the prerequisites contained in sec. 80E(1).

It was submitted that the taxpayer had not carried on business at all times during the 1979 financial year. Reliance was placed on the following alleged factual situation:

• (i) the company ceased a business on 8 December 1978 and it did not recommence a business until 1 February 1979. Work carried on, if any, between those two dates

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  was only of a preparatory nature for a business yet to be commenced;
• (ii) between the above-mentioned dates, the company was not carrying on any business, there was, on the evidence, only a meeting or meetings and a few telephone calls;
• (iii) the whole of the goodwill, plant, fittings and stock were sold by the taxpayer referable to the business previously carried on by it, thereafter there were not any accounts to settle, no company employees, and no moneys to be received. There was not an intention on the part of the taxpayer to recommence business at the previous location;
• (iv) the business that was commenced on 1 February 1979 was a new business at a new location;
• (v) there was a clear break between the one business and the other and there was not any continuity between the two as to staff, plant, stock, or any other indicia of carrying on business.

The submission was thus that a business had been terminated on or about 8 December 1978 and another business not commenced until about 1 February 1979. I consider that there is much to be said for this submission and even if the business before 8 December be the "same" as the business after 1 February 1979, a view that I do not hold, that the same was not carried on as required by the subsection "during the year of income". (See
Northern Engineering Pty. Ltd. v. F.C. of T. 79 ATC 4238 at p. 4241.)

This is not a case where the nature of the business required little activity or activity was suspended due to causes beyond the taxpayer's control. The sale of the business and cessation of activity on 8 December 1978 was attributable to a decision by B on behalf of the taxpayer to discontinue the company's involvement in that business because it had been unprofitable and there was no intention to resume the conduct of that business.

The Commissioner further submitted that the business carried on by the taxpayer at the relevant times was not "the same business".

In
Avondale Motors (Parts) Pty. Ltd. v. F.C. of T. 71 ATC 4101 at pp. 4105-4106, Gibbs J. said, when considering the subsection as it then was:

"The question whether a company has commenced a new business or has continued an old business under different conditions is simply one of fact. In some circumstances a company may expand or contract its activities, it may close an old shop and open a new one, without starting a new business... 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. It seems to me natural to read the section as referring to the same business, in the sense of the identical business, and this view is supported by a consideration of the purposes of the section...

I conclude that sec. 80E(1)(c) [sec. 80E(1)(b)] requires that the business carried on at all times during the year of income should be the same business; mere similarity of kind is not enough."

In
Fielder Downs (W.A.) Pty. Ltd. v. F.C. of T. 79 ATC 4019 at p. 4023, the meaning ascribed to the words "the same business as" in Avondale Motors (Parts) Pty. Ltd. (supra) was followed. I consider that such meaning is appropriate to be applied to the factual circumstances of this case.

The facts sought to be relied upon by the Commissioner have been detailed earlier in these reasons but might be shortly set forth as follows:

• (a) The business carried on under the description "restaurant and take-away food shop proprietors" was that of take-away foods and an unlicensed restaurant. The customers were generally office workers, shoppers and some students, the taxpayer's business being able to be managed by B with the assistance previously mentioned. The business was basically of this nature.
• (b) The business assumed in February 1979 was carried on by way of a partnership. It had full-time employees, served lunches and dinners and the premises were licensed enabling liquor to be sold in the restaurant and at a bar. The business was large enough

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  to warrant the introduction of two partners by reason of the need for their expertise and assistance in funding the project. The clientele was derived from patrons to the theatre, attendees at conferences and seminars, students and to a limited degree, nearby office workers. The lunch time trade was not paramount, the function side was substantial.

In my view, the various aspects of the two businesses so identified bring them within the description of being "similar" but not "the same" within the meaning ascribed to these words by the authorities to which I have previously made mention. It is my view that the businesses carried on by the taxpayer at the relevant times were not "the same" within the meaning of the subsection.

It was further contended on behalf of the Commissioner that income had been derived during the 1979 financial year from a business of a kind that it did not carry on, or a transaction or transactions of a kind that it had not entered into in the course of its business operations before the change of ownership. In view of the finding that I have already made, it is not necessary for me to enter upon this ground for disallowing the objection.

The following differences were however specifically identified:

• • the business that commenced on 1 February 1979 was carried on by way of a partnership;
• • management fees were received after 1 February 1979; they had not been received prior to 8 December 1978. This was a new kind of transaction, a new kind of activity after the change;
• • the function/conference/seminar catering after 1 February 1979 was a business of a kind not carried on previously and it was of a substantial nature;
• • the income from the sale of liquor both in the restaurant and at the bar was derived from a business of a kind that had not previously been carried on.

These differences might well bring the situation within the meaning of the first limb of sec. 80E(1)(c) (see
J. Hammond Investments Pty. Ltd. v. F.C. of T. 77 ATC 4311 at p. 4317), but not the second. As previously indicated, I do not find it necessary to make a final decision in relation to the application of this subsection.

Decision

For the reasons that I have already given, I am of the opinion that the prerequisites of sec. 80E(1) have not as to one or more thereof been satisfied by the taxpayer.

Accordingly I would affirm the decision of the respondent Commissioner as to the taxpayer's objection.