• The impact of this case on ATO policy is discussed in Decision Impact Statement: Federal Commissioner of Taxation v Co-Operative Bulk Handling Ltd (Published 16 December 2014).

FC of T v CO-OPERATIVE BULK HANDLING LTD

Judges:
Mansfield J
Siopis J
McKerracher J

Court:
Full Federal Court, Perth

MEDIA NEUTRAL CITATION: [2010] FCAFC 155

Judgment date: 17 December 2010

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MANSFIELD AND MCKERRACHER JJ

Introduction

1. The appellant ( the Commissioner ) appeals from a decision of a judge of this Court (
Cooperative Bulk Handling Ltd v Commissioner of Taxation [ 2010 ] FCA 508 ). The primary judge concluded that the respondent, Co-operative Bulk Handling Limited ( CBH ) was, in effect, entitled to maintain its tax exempt status which it has enjoyed for many years.

2. It will be necessary to consider the history in some detail and to examine the activities of CBH together with the legislative context in which CBH comes to be in this position.

3. There has been a significant change in the range of activities and financial turnover in CBH since its inception in 1933. There is a question as to whether those changes result in it being no longer entitled (if, on a correct view, it ever was, according to the Commissioner), to exemption from income tax on certain statutory criteria.

4. For the following reasons, the decision of the primary judge was correct.

Statutory framework

5. CBH will be entitled to exemption from income tax only if it is a society or association established for the purpose of promoting the development of Australian agricultural resources and is not carried on for the profit or gain of its individual members. It is not in dispute that it is a " society or association " .

6. The applicable provisions of the Income Tax Assessment Act 1997 (Cth) ( the 1997 ITA Act ) falling for consideration in this appeal are set out in s 50.1 and s 50.40 as follows:

• 50-1 Entities whose ordinary income and statutory income is exempt

  The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

• 50-40 Primary and secondary resources, and tourism
  

  Primary and secondary resources, and tourism
  Item	Exempt entity	Special conditions
  8.1	…
  8.2	a society or association established for the purpose of promoting the development of any of the following Australian resources: (a) agricultural resources; (b) horticultural resources; (c) industrial resources; (d) manufacturing resources; (e) pastoral resources; (f) viticultural resources; (g) aquacultural resources; (h) fishing resources	not carried on for the profit or gain of its individual members
  8.3	…

7. The history leading to the enactment of the current provisions shows that similar terminology was used in previous statutes, although the setting out was a little different. There has been, therefore, a consistency of legislative approach on this topic for a number of decades. The earlier provisions provided as follows:

8. Section 14(1)(j) of the Income Tax Assessment Act 1922-34, exempted:

" the income of any society or association not carried on for the purposes of profit or gain to the individual members thereof, established for the purpose of promoting the development of aviation or of the agricultural , pastoral, horticultural, viticultural, stock-raising, manufacturing or industrial resources of Australia to the extent to which the income is not derived from a trade or business carried on by the society or association, or from services rendered by the society or association to any person for reward; … " (italics and emphasis added)

9. The Income Tax Assessment Act 1936 (Cth) ( the 1936 ITA Act ) deleted the words emphasised in bold. As noted by Hill J in
Cronulla-Sutherland Leagues Club Ltd v Commissioner of Taxation (Cth) (1990) 23 FCR 82 , this change, according to the explanatory handbook published in 1936 showing the differences between the 1936 ITA Act and the 1922 Act was made to avoid an argument that societies such as agricultural societies were taxable on their trading income, for example, for holding agricultural shows. The rendering of services, therefore, was not an impediment to exemption. The words in italics are similar to those appearing in the 1997 ITA Act.

10. Section 23(h) of the 1936 ITA Act relevantly provided as follows in terms very similar to the present legislation:

• " 23. Exemptions-

  Subject to section 22A, the following income shall be exempt from income tax: -

  • …
  • (h) the income of a society or association not carried on for the purposes of profit or gain to the individual members thereof, established for the purpose of promoting the development of aviation or tourism or of the agricultural , pastoral, horticultural, viticultural, manufacturing or industrial resources of Australia ;

  … " (emphasis added)

11. The focus of s 50-40 of the 1997 ITA Act is on those societies or associations whose purpose is to promote the development of Australian resources. The resource in this instance is agricultural resources.

12. In the present appeal, there is no doubt about the formalities of the established objects of CBH. The true question is whether in the year of tax income it could properly be described as an association promoting the development of agricultural resources which was not carried on for profit or gain of its members.

13. Two aspects, at least, of s 50-40 may be disposed of at the outset as they are common ground.

14. First, " established " means maintained at the time at which qualification under the section is in issue (
Renmark Fruitgrowers Co-operated Ltd v Commissioner of Taxation (Cth) (1969) 121 CLR 501 at 506 ,
Brookton Co-operative Society Ltd v Federal Commissioner of Taxation (1981) 147 CLR 441 at 445 ).

15. Secondly, " for the purpose " means " for the sole or dominant purpose " of conducting the relevant activity ( Brookton at 444, 453, 470,
Australian Insurance Association v Federal Commissioner of Taxation (Cth) (1979) 41 FLR 256 at 261-262 ,
Boating Industries Association (NSW) v Federal Commissioner of Taxation (1985) 75 FLR 467 at 472 ). In Boating Industries it was held that the requirement of s 23(h), a predecessor of s 50-40, was that the relevant organisation be " established " for, and not merely " involved " in, the purpose stated. In ascertaining whether the purpose requirement is met, the society or association ' s constitution is relevant but not conclusive:
A & S Ruffy Pty Ltd v Commissioner of Taxation (Cth) (1998) 98 CLR 637 at 649 ,
R v Federal Court of Australia; Ex p WA National Football League (Inc) (1979) 143 CLR 190 at 208 , where Barwick CJ observed that:

" … the nature of a company may not be discernible from a perusal of its memorandum. The only sure guide to the nature of the company is a purview of its current activities, a judgment as to its nature being made after an overview of all those activities. "

The focus must be upon the periodic or recurrent purposes of the body in the year of income. The formal objects or purposes for which the body was incorporated may also be considered but taken alone will not be determinative.

16. In the context of s 23(g)(iii) of the 1936 ITA Act, exempting the income of a " society, association or club established for the encouragement or promotion " of an athletic game, Lockhart J in the leading case (in which the authorities to that time were surveyed), Cronulla , said (at 95) of the claimant for exemption that:

" It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object. "

17. In
Terranora Lakes Country Club Ltd v Federal Commissioner of Taxation (Cth) (1993) 25 ATR 294 Hill J said (at 296):

" Ultimately, the question is what the true character and nature of the applicant is and … that question of characterisation is to be determined having regard to the objects, purposes and activities of the taxpayer. "

18. In
Federal Commissioner of Taxation v Bargwanna (2009) 72 ATR 963 (at [ 28 ] ) , Edmonds J held that having regard to the scope, object and purpose of the 1997 ITA Act and the 1936 ITA Act as a whole, such provisions are not to be read widely. Strict adherence to the statutory requirements is necessary before the status is conferred. Although that decision is on appeal, it may readily be accepted that a loose interpretation permitting exemption would not be appropriate.

Background and history

19. Before the primary judge, CBH appealed under Pt IVC of the Taxation Administration Act 1953 (Cth) ( the TAA ) from the objection decision of the Commissioner issued on 25 November 2008. In that decision, the Commissioner disallowed the objection of CBH dated 30 September 2008. The objection decision was in the form of a private ruling given by the Commissioner as a result of submissions from CBH. The ruling was to the effect that CBH was not exempt from taxation under s 50-1 of the 1997 ITA Act in the years from 31 October 2009 to 31 October 2012.

20. The reason the Commissioner reached that conclusion was that CBH was not established for the purpose of promoting the development of Australian agricultural resources but rather was carried on for the profit or gain of its individual members.

21. The primary judge disagreed and allowed the appeal by CBH.

22. To put the competing views in context, it is necessary to have an understanding of the history of the activities of CBH.

Commencement of CBH

23. CBH was incorporated in 1933 for the purpose (as stated in its Memorandum of Association) of establishing, maintaining and conducting any schemes or systems for the handling of wheat and/or other grain in bulk. Before CBH was incorporated, most wheat harvested in Western Australia was bagged at the farm for handling by road and rail and then exported primarily through the West Australian Ports of Geraldton, Fremantle, Bunbury and Albany. The system of bulk handling which was introduced in Western Australia was not simply a private project but had active support from the State Government.

24. After the 1933 incorporation of CBH, a Royal Commission into the bulk handling of wheat was conducted in Western Australia in 1935. The report from that Royal Commission concluded that the handling of wheat in bulk by CBH in the two preceding seasons had been of advantage to the wheat growing industry in Western Australia. It concluded that subject to control by the Parliament, CBH should be allowed to extend and carry out the proposals for a state wide scheme relating to the bulk handling of wheat including the development of new sidings and up to date port facilities.

Industry based legislative developments

25. Later that year in acceptance of these recommendations, the Bulk Handling Act 1935 (WA) ( the BHA 1935 ) was passed. The purpose of this Act, according to its preface, was to regulate the business of CBH " to insure that proper service was given to the growers of wheat and to merchants and millers and all other persons concerned in its marketing and disposal " .

26. The BHA 1935 provided some important features designed to ensure that its objects were achieved. CBH was given a monopoly for 20 years (at that time) over the right to receive wheat in bulk at railway stations where it had installed country receivable bins and the sole right to contract or arrange for the handling, transport by rail and delivery of wheat in bulk in Western Australia.

27. The Minister controlled the installation of bins and equipment (BHA 1935 ss 4, 6, 7 and 8). The BHA 1935 (by s 5) imposed an obligation on CBH to install, maintain and operate a country bin or other facilities where the Minister was satisfied there was an average annual receival in excess of 20,000 bushels of wheat over a period of five years preceding the request. There was a prohibition (by s 9) on CBH and its officers from trading in wheat and by s 11 a prohibition on CBH of providing discriminatory or preferential treatment to persons using its facilities and services.

28. The BHA 1935 established strict controls (ss 17, 18 and 20) over CBH ' s handling of grain including an obligation on CBH to accept delivery of wheat of certain standards, (s 24).

29. The 20 year monopoly granted to CBH of bulk wheat handling in Western Australia (preserving the same conditions) has extended from 1935 through to the present day. The BHA 1935 was replaced by the Bulk Handling Act 1967 (WA) ( the BHA 1967 ).

Historic tax arrangements

30. As a starting point, it will be noted that it is only a society or association which can be exempt. When CBH was incorporated in 1933 it was a company limited by shares but was later converted to a co-operative company under the Companies (Co-Operation) Act 1943 (WA).

31. CBH ' s Memorandum of Association provides:

• 2. The objects for which the Company is established are:
  • (a) To establish maintain and conduct any schemes or systems for handling of wheat and/or other grain in bulk or otherwise.
  • (b) To receive handle transport grade classify and store wheat and/or other grain.
  • …
  • (f) To carry on either in conjunction with or separately from the business authorised to be carried on by the preceding paragraphs or any of them all or any businesses or business which in the opinion of the Directors may be conveniently carried on by the Company or promote assist be incidental or conducive to the attainment of its objects or any of them.
  • (g) To carry on all or any of the said businesses in any part of the world either as principals agents contractors or otherwise and either alone or in conjunction with others and either by or through agents sub-contractors trustees corporations or otherwise.

32. It is not suggested by the Commissioner that deriving income from conducting a business precludes exemption.

33. In Cronulla , (at [ 47 ] ), Hill J made it clear that the legislature in s 23(g) did not intend to exclude from exemption income which might be described as income from a business where otherwise the association or club deriving that income met the statutory description in s 23(g)(iii). On appeal, the Full Court did not suggest otherwise. The appellant in that case only engaged in the provision of profitable social amenities, passing over the profit to the Football Club. Hill J at first instance agreed with the Commissioner that the appellant was not established for the promotion of a sport.

34. CBH (and the primary judge) observed that the position now advanced by the Commissioner is the opposite of that advanced for almost 40 years. On that topic, senior counsel for the Commissioner stressed that circumstances had significantly changed, particularly in relation to the concept of " development " . Additionally, the point was made that although the Commissioner may now be taking a different view on eligibility for exemption, that may simply mean that the Commissioner should have taken that view from the outset. In any event, the task before the Court is to apply the legislation to the circumstances prevailing in the relevant tax years.

35. Until 1972, CBH was taxed as a co-operative under the relevant provisions of the 1936 ITA Act. In March 1971, CBH submitted to the Commissioner for his consideration, draft proposed amendments to the BHA 1967 so that the Commissioner could advise if CBH would be exempt from income under s 23(h) of the 1936 ITA Act.

36. The proposed amendment included the insertion of s 35A into the BHA 1967. Section 35A provides:

• " 35A. Manner of applying income and property of the Company

  Notwithstanding any of the provisions of the (Companies Co-operative) Act 1943 or of the memorandum or articles of association of the Company -

  • (a) no part of any income or property of the Company shall be , directly or indirectly, paid or transferred as a profit, by way of a dividend or bonus or otherwise, to any member of the Company ;
  • (b) all the income and property of the Company shall be applied , subject to this Act, towards the objects of the Company as set out in clause 2 of its memorandum of association and not otherwise;
  • (c) the directors of the Company may set aside out of the profits of the Company such sums as they think fit as reserves for application, in the discretion of those directors, in meeting contingencies or in achieving any other purpose that is, under the memorandum or articles of association of the Company but subject to this Act, a proper purpose for the application of profits of the Company;
  • (d) where any reserves set aside pursuant to paragraph (c) are not immediately required for application in accordance with that paragraph, they may, in the discretion of the directors of the Company, be applied in the business of the Company or in furthering, subject to this Act, the objects of the Company as set out in clause 2 of its memorandum of association, paying off or reducing some or all of its debentures for the time being outstanding, or liquidating any other indebtedness of the Company or they may be invested in such investments as those directors think fit; and
  • (e) if the Company is wound up and any surplus assets remain after payment of its debts and liabilities and the costs of the winding up and repaying to shareholders the capital paid upon their shares, those surplus assets shall not be distributed among the members of the Company but shall be distributed or applied in such other manner as shall be directed by the Treasurer of the State acting for and on behalf of the State . " (emphasis added)

37. Thus, s 35A of the BHA 1967 ensures that the income and property of CBH could not be applied for the benefit of its members. No part of any income or property is to be paid or transferred as a profit directly or indirectly by way of dividend or bonus or otherwise to any of its members (emphasis added). Further, by subs (b) of s 35A, all the income and property of CBH was required to be applied, subject to the BHA 1967, towards its objects as set out in cl 2 of the Memorandum of Association, namely, the establishing and maintenance of systems for handling of wheat and/or other grains.

38. The Commissioner provisionally advised on 24 September 1971 that CBH would be exempt from income tax on its income if the foreshadowed amendments were passed to the BHA 1967. Subsequently, the amendments were passed with statements made in State Parliament, which also confirmed that the purpose of the amendments to the BHA 1967 was to ensure that CBH would be exempt from paying tax on any surplus income it received. It was observed in State Parliament that the consequence would be that the grain growers of Western Australia most of whom were shareholders of CBH would receive the advantage of the superior service they received and reduced rates. Now, almost 40 years later, it is, in part, the provision of this advantage to the growers which the Commissioner relies upon in concluding that CBH should no longer be exempt from income tax.

39. There were further amendments made in 2002 to the BHA 1967. The effect of these was to remove a number of restrictive provisions and to facilitate the " merger " of Grain Pool Pty Ltd into the CBH group of companies, controlled by CBH.

40. The BHA 1967 in its current form is an " Act to make better provision for the bulk handling of grains by [ CBH ] " . It:

• • requires CBH to determine grades for grain delivered (s 6A);
• • imposes an obligation on CBH to insure grain in its custody or control (s 11);
• • requires CBH to furnish financial accounts to the Minister for tabling in Parliament and authorises the Auditor General to examine the records of CBH (s 12 and Reg 4);
• • authorises CBH to purchase its shares from any member (s 13);
• • requires that CBH pay amounts of any shortfalls of delivery of grain (s 16);
• • provides that CBH does not have title to grain, but with respect to grain is a custodian for reward (s 18);
• • requires CBH to allow use of its port facilities and equipment by any person on receipt of prescribed charges (s 19);
• • authorises CBH to impose charges for the handling, storage and delivery of grain, as fixed by the Board of Directors from time to time (s 34);
• • provides that CBH has a lien on grain held, with respect to its charges (s 35);
• • prohibits the distribution of income or property to any member and provides for its application otherwise (s 35A);
• • requires and authorises CBH to issue weighbridge tickets and warrants with respect to grain received (s 36 and s 37);
• • requires CBH to handle grain in accordance with the Act; to receive (subject to certain requirements) all grain tendered to it in bulk and to grade the grain tendered. It also provides for a guarantee of quantity and quality, authorises CBH to sell grain not delivered by 30 September in the following year, establishes the procedure for shippers to give notice to CBH; and establishes procedures for the sampling of grain and dispute resolution (Pt VII); and
• • provides CBH with the right to receive and handle such seeds, other than wheat or barley, as the Minister may approve (s 52).

41. The private ruling which has given rise to this appeal is not the first. In 1996, when there was some suggestion that the BHA 1967 may be repealed, CBH proposed to amend its Articles of Association to incorporate provisions which would prevent the distribution of its profits to its members. The purpose in doing this was to endeavour to preserve the " not for profit " status and tax exemption then under s 23(h) of the 1936 ITA Act.

42. In that year, in November, CBH applied to the Commissioner for a private ruling on whether it would continue to be exempt from income tax if s 35A of the BHA 1967 was repealed and the proposed amendments which would reflect the repealed provisions were adopted into the Articles of Association of CBH. The Commissioner ruled that the income of CBH would continue to be exempt providing the amendments were formally adopted and if those corresponding parts of the BHA 1967 were repealed and providing the general activities of CBH continued to satisfy the requirements of s 23(h) of the 1936 ITA Act.

43. Following this private ruling in 1996, CBH ' s Articles were duly amended in a manner consistent with the provisions of s 35A of the BHA 1967.

Current activities of CBH

44. The growth in grain production in Western Australia has been considerable since 1933. The area of the State devoted to growing grain crops has increased by more than 380 % . The tonnage received, at CBH ' s commencement of operations, was 42,500 tonnes. It increased to a high of 14.7 million tonnes in 2004. It was 8.4 million tonnes in 2008. Correspondingly, the number of receivable points has increased considerably over that period but in recent years there has been a contraction of the number. At the outset, there were five receivable points, 30 years later there were 334 but by 2008, the number of receivable points had contracted to 152. That said, the amount of grain able to be taken at those 152 points was significantly higher than in the past. Whether the full range of facilities will ever be required in any given season depends much upon the fluctuations in weather and price and the success or failure of crops sown on marginal land.

45. As the grains industry in Western Australia has a strong export base, extensive facilities are conducted by CBH at Esperance, Albany, Kwinana and Geraldton. Facilities were also established at Bunbury and Fremantle (in the metropolitan area) but those have now closed.

46. The primary judge noted (at [ 33 ] and [ 34 ] ) that the Albany bulk handling facilities, known as the Albany Grain Terminal, were developed by CBH to facilitate the expected increase in grain crops being grown in the " new lands " of the Great Southern area of Western Australia from the 1950 ' s. Without those facilities, growers would have had to ship grain through Bunbury or Fremantle at considerable cost. In 1984 CBH spent $ 30 million on major extensions to the Terminal to cater for expected increases in grain from the area. Additionally with the anticipated advent of " higher rainfall " cropping and the introduction of different grains to the region, the Terminal was designed to provide storage for an increasing number of grain segregations. It was also noted that significant work was performed in the area of product quality, with ten 10,000 tonne cells being designed to enable the use of fumigants and inert atmospheres including CO2 and N2 in the prevention of grain infestation. The development of controlled atmosphere technology as a method of pest control had already won CBH international recognition and allowed marketing authorities to offer Western Australian grain with minimal amounts of chemical residue. In 2006, CBH completed further extensions and developments to the Terminal at a cost of $ 130 million. It now has a capacity of 423,600 tonnes. At the time the anticipated cost of the upgrade did not meet the Board ' s " hurdle rate of return " for capital works and it anticipated that it would result in a negative net present value.

47. His Honour noted that CBH constructed and maintains the Metro Grain Centre, a large innovative and modern bulk handling and distribution centre in Forrestfield near Perth. It has rail access and provides bulk handling facilities and storage for more than 65 types of grains and other primary product commodities. The Centre, opened in 1998, was built in part to replace the Fremantle facility to cater for the increasing segregation of crops required for international markets and to provide for modern and increasing grain hygiene standards required by international markets, as well as to service increasing demands of the domestic grain market.

Current income of CBH

48. Receipts of CBH are substantial. Figures for the taxation year in question were not available but in the financial year for 2007 its gross income was approximately $ 233 million resulting in a loss of $ 47,000. In the previous year the income was $ 321 million with a profit of $ 83 million. It derives its income primarily from growers and others who utilise, for a charge, its services and facilities. The growers contribute a little under 50 % to the gross revenue of CBH. The charges which are imposed upon them are set by CBH ' s Board of Directors. The primary judge accepted that in light of its objectives, rather than adopting a purely commercial approach to the level of fees and charges, the philosophy adopted by the Board has been to set its fees based upon the concerns for grower and industry costs while continuing to enable itself to provide the services at the required level.

49. The primary judge accepted that the provision of the services has required (and continues to require) innovation and variation to create the greatest efficiency in the provision of modern services for the benefit of growers. Some of those services extend to the development of new technologies on growers ' farming properties in addition to those pertaining to CBH ' s own storage and handling facilities.

50. Over and above this, there is an ongoing regular program of research and development in relation to new techniques, new infrastructure and the achievement of improved grain quality, although expenditure on research and development in the relevant years has been modest. However, as noted by the primary judge, CBH has spent millions of dollars overall on these projects, not all of which are successful. The primary judge accepted that the improvement of the grain quality gave rise to a better reputation for the industry, easier marketing and higher prices for growers. Such activities, as noted by the primary judge (at [ 39 ] - [ 40 ] ), have included the following:

" Australian Grain Centre

• (a) the establishment in 2003 of the Australian Grains Centre, an accredited and sophisticated grain laboratory which undertakes grain testing and analysis in support of the industry nationally. It also performs a significant research and development role, primarily for the general benefit of the grains industry. It is not a project (sic-profit) earning activity and the decision to establish the Centre was for the benefit of the grain industry generally;

Infratec Machines

• (b) the development, in conjunction with a Swedish company, of Infratec machines which report grain colour, protein and moisture content, allowing grain marketers to determine and pay for quality grain measured on a load by load basis and to segregate grain in their respective markets. It has revolutionised the grain quality assessment process with this world-renowned and adopted sampling equipment;

Quality Assurance Accreditation

• (c) the development of and support for International Standards within its own storage network. Approximately 50 % of WA grain is now quality assured. This has been achieved at considerable cost to CBH and despite grower resistance. This has achieved a premium export price for quality assured grain. Without CBH ' s initiative and persistence, many international markets would have been lost to the Australian industry;

Bio-security

• (d) research and development and improvement of methods to detect chemicals and contaminants in grain. Fast and rigorous analysis is conducted by CBH before grain is exported, reducing the risks and costs to growers and marketers of customer rejections and damage to the reputation of Western Australian grain;

Image Analysis

• (e) current funding and developing of a grain image analysis method to act as an automatic sampler of most types of grain imperfections and quality. If successful this will reduce the incidence of human error thereby enhancing the reputation of Western Australian grain and providing more reliable information for marketers;

Grain Caretaker Management

• (f) CBH has revolutionised the methods used for sealing and fumigating Australian grain storages to enable the safe and efficient use of Phospine to eradicate insects within the specially designed Open Bulk Head storages. Prior to these developments, Australian grain exports suffered ship rejections for insect infestation and high concentrations of chemicals. The investments by CBH in this development were significant and the developments made are now used throughout Australia. They have saved tens of millions of dollars for the Australian grains industry. Australian grain is now largely free of insects, chemicals and contaminants;

Moisture Management

• (g) investment in new infrastructure and moisture monitoring techniques to allow for the delivery of grains with higher moisture contents into its storage facilities, so achieving reduced risk, increased harvest delivery patterns and improved quality, and a 21 day harvesting cycle making cropping viable for many growers who previously would have suffered significant losses in crops. These developments have encouraged the expansion and development of wetter areas in the State for cropping; and

Cultivation and marketing of new grains

• (h) the promotion of the cultivation and marketing of new grains in Western Australia, including lupins (which add nitrogen to the soil and make new and previously unviable land, especially sandy soils, available for cultivation), new cultivars of barley (which are high yielding and suit the malting industry requirements), and canola (as a viable rotation crop, to break disease cycles with substantial benefits for the grain industry, and as a major crop throughout the wetter regions of WA). "

51. CBH has also engaged in the following:

" Value Adding Facility

• (a) the establishment of a Value Adding Facility at the Metro Grain Centre at a costs [ sic ] to CBH in excess of $ 20 million, which deliberately operates at a loss but is designed to attract new entrants into the industry for the benefit of the growers of Western Australia. The VAF has provided additional stability to growers as marketing alternatives have increased;

Genetically Modified Service Provision

• (b) the development, at its costs of technology which will allow, if the technology is accepted, the segregated collection and marketing of genetically modified crops in parallel to the existing supply chain;

Maintenance of receival points

• (c) the upgrading and reconfiguration of bulk grain handling receival sites to accommodate the different harvesting characteristics in different areas and of different crops, a process which involves large capital outlays and the continued operation of sites at an operating loss;

Containerisation Facilities

• (d) recent extensive investment in facilities to store and ship grain in containers thereby opening up new export markets; and

Harvest Mass Management Scheme

• (e) the development (including changes in computer systems, policies, training and communications) of a Harvest Mass Management Scheme to manage the incidence of truck overloading between the farm-gate and CBH ' s weighbridges by providing a level of flexibility in load masses which will comply with proposed changes to the law regulating road use. "

52. One of the initiatives being pursued by CBH at the time of applying for its private ruling from the Commissioner was the development of a " business model " known as " Grain Express " . This was in response to the introduction by the Federal Government in 2008 of new wheat exporting legislation which would provide qualifying entities with the ability to export wheat, removing the exclusive right previously held by the Australian Wheat Board ( AWB ). CBH was concerned (as a result of its previous experience with the deregulation of barley marketing) that there would be substantial additional supply chain costs to the grain industry arising from the deregulation of wheat marketing. It developed " Grain Express " , which was designed to ensure that the supply chain efficiencies that had been historically achieved under previous export arrangements would be continued in the future. It was proposed that Grain Express would introduce a range of initiatives extending well beyond the " access regime " requirements contemplated in the then new wheat exporting legislation and would, amongst other benefits, potentially avoid rail freight increases. The saving in supply chain costs was seen as being a direct benefit to the grain industry as a whole in Western Australia, enabling it to retain its competitive cost advantage in servicing the Asian and Middle-East regions.

53. The business model, " Grain Express " involved CBH engaging in exclusive dealing within the meaning of s 47 of the Trade Practices Act 1974 (Cth). In order for this proposal to be introduced, CBH needed regulatory clearance or approval from the Australian Competition and Consumer Commission ( the ACCC ). That approval was forthcoming from the ACCC which was apparently satisfied that the introduction of the system would be of benefit to the industry generally at least to the extent of not substantially lessening competition. The ACCC concluded as follows:

• " …
• • the proposed arrangements do not foreclose potential competitors to CBH from entering the market for grain receival, storage and handling
• • growers and traders of grain are free to make their own arrangements in respect of the transportation of grain from the farm gate to end user point, or from a Destination Site to end user point
• • the proposed arrangements may stimulate competition in the market for the relevant CBH transport contracts by providing greater certainty in respect of transport volumes
• • acquirers and marketers of grain will continue to be able to take advantage of niche marketing opportunities and
• • CBH ' s amended Ring Fencing Policy provides an adequate framework to limit the potential for information obtained by CBH to be transferred to and used anti-competitively by CBH ' s trading subsidiaries. "

54. The ACCC noted that approximately:

" 90 per cent of the Western Australian grain crop is exported. This is in contrast with eastern states, where 50 per cent of the grain crop is exported. Japan is the largest recipient of Western Australian grain, closely followed by Indonesia and South Korea. "

Current diversification - holding company and subsidiaries

55. The activities of CBH have undoubtedly diversified substantially since it was commenced in 1933.

56. Over and above its core business of bulk handling of grain, CBH became a holding company for a number of subsidiaries which carry on business in their own right. Those subsidiaries are not tax exempt. Each is operated as a separate business, but some of them share services with CBH and in doing so pay CBH for services provided on an arms-length basis. In each instance, directors of CBH are also directors of the subsidiary companies.

57. The method of investment conducted by CBH through the subsidiaries was predominantly by way of acquisition of equity and corresponding profit or distribution from a subsidiary to CBH by way of fully franked dividend.

58. All of these subsidiaries are involved in the grain industry and their functions are regarded by CBH as being consistent with the objectives of CBH under the terms of its Articles of Association. Beyond that, it is unnecessary to recite in detail the identity and activities of the subsidiaries.

Issues on appeal

59. Although there were more grounds of appeal than the issues identified below, the accepted real issues were whether or not the primary judge erred in law:

• (a) in holding that the means by which grains are transported, stored and loaded in bulk for consumption and export after leaving the farms on which they are produced form part of " Australian agricultural resources " within s 50-40, item 8.2 of the 1997 ITA Act;
• (b) in holding that CBH was established for the purpose of promoting the development of Australian agricultural resources; and
• (c) in holding that CBH is " not carried on for the profit or gain of its individual members " in their capacity as members.

Reasoning of the primary judge

60. In considering the purpose of CBH, the primary judge stressed (citing Tamberlin J in
Visa International Service Association v Reserve Bank of Australia (2003) 131 FCR 300 at [ 293 ] ) that all of the words of the legislative criteria read in combination must be construed as a " collocation of words selected as a whole " . " … Sense must be given to the expressions read together as an entirety rather than to individual words added to each other " .

61. Thus what must be " promoted " was not agriculture nor a specific agricultural activity but " the development of Australian agricultural resources " .

62. His Honour concluded that " the development of agricultural resources " extends beyond what is agricultural, such as the cultivation of the land alone. If it did not, " resources " would be otiose. The criterion would simply be the development of Australian agriculture. At [ 58 ] - [ 61 ] , the primary judge characterised the Commissioner ' s submission as being, in effect, that the development of agricultural resources was confined to the farm side of the farm gate but did not extend beyond the " farm gate " to the receiving, handling, storage and transporting of grains grown on farms. That argument was rejected as being unduly narrow, as the expression " agricultural resources " was wider than the word agriculture and extended beyond " land " which is cultivated to produce crops of grains.

63. The primary judge noted that identifying the relevant purpose involved considering the purposes expressed in the constitutive documents, the " periodic or recurrent " principal or predominant purpose, the activities, and the history. His Honour was satisfied (at [ 88 ] ) that the principal, dominant or main purpose of CBH was and remains to promote the development of Australian agricultural resources by promoting the development of the grain growing industry of Western Australia.

64. The primary judge also rejected the Commissioner ' s submission that CBH conducted its activities principally for the commercial benefit of its members. His Honour concluded that the facts did not support such a conclusion nor did they support the Commissioner ' s submission that CBH limited its activities on commercial grounds to those most profitable. To the contrary, it was evident that CBH deliberately engaged in a number of important activities at a loss. Even its fees were not commercially driven for profit but rather were generally based on concerns for growers and industry costs, balanced against the need to provide services at the required level and not to maximise its profit (at [ 93 ] ).

65. Further, his Honour noted that s 35A(a) of the BHA 1967 prohibited CBH from paying or transferring any part of its income or property as profit by way of dividend, bonus or otherwise to any of its members. By subs (b), all income and property of CBH was required to be applied towards its objects as set out in cl 2 of its Memorandum of Association and not otherwise. Under s 35A(e), any surplus assets on a winding up were to be applied as directed by the Western Australian Treasurer.

66. The primary judge concluded (at [ 95 ] ) that the overall activities of CBH benefited not only growers who were CBH members but also growers who were not members and who paid for the services provided by CBH at the same rate as its members. Its activities also benefited grain traders, millers and the State generally. This was entirely consistent, his Honour held, with the preamble to the BHA 1935 which described as an object of that Act that " proper service [ be ] given to the growers of wheat and to merchants and millers and all other persons concerned in its marketing and disposal " .

67. His Honour noted (at [ 97 ] - [ 100 ] ) that the principal or predominant activities of CBH, including its involvement through its subsidiaries and other investments was to help to render growers, traders, millers and exporters more competitive in what is largely an export driven market. By doing this it necessarily promoted the development of Australia agricultural resources. He rejected the Commissioner ' s submission that CBH was a " mature " business for the carrying on of the grain handling business in the most commercially effective way. The numerous activities apart from the core activity of bulk storage necessarily enhanced the reputation of Australian wheat grown in Western Australia, in turn advancing Australia ' s competitiveness in the grain export market. His Honour was not satisfied that the business of CBH has plateaued or reached a static state if the description " mature " was intended to convey that. Rather, his Honour was persuaded on the evidence that with the advent of new markets, new crops, new lands, new technology, new regulations and new methods, the challenges facing CBH were evolutionary in character such that its business was continually open to development by advancement.

68. In relation to the second limb of the requirement for exemption, namely, the negative requirement in the right-hand column of s 50-40 that the business be " not carried on for the profit or gain of its individual members " , his Honour concluded that the activities of CBH were not so carried on. The qualification at s 50-40 of the 1997 ITA Act did not preclude any benefit to its members but rather required that activities of CBH should be not be " carried on for the profit or gain of its individual members " .

69. On this topic (at [ 104 ] - [ 110 ] ) the primary judge said:

• 104 The Commissioner submits that the special condition requires an objective conclusion to be drawn from the operations of the entity as to whether it is carried on for profit and gain and for whose profit and gain.
• 105 The Commissioner contends that the special condition precludes the exemption of CBH as the relevant scheme shows that CBH was founded as a grower co-operative business of and for its members, and its activities and investments have expanded progressively on this business basis. The Commissioner refers in support to clause 4 of the Memorandum of Association which, he argues, provides for the distribution of dividends to current members and on certain conditions to members from previous years.
• 106 Clause 4 is in these terms:

  Before declaring a dividend out of the profits for the then last financial year of the Company the Directors may in their discretion provide for the payment of a dividend upon the shares which had been issued and were held by shareholders during any one or more of the three preceding financial years in respect of which no dividend has been declared PROVIDED THAT such dividend shall be payable to the persons registered as the owners of such shares at the date of the declaration of such dividend.

• 107 On the other hand, the Articles of Association of CBH at articles 110, 111 and 114 are as follows:

  " INCOME AND PROPERTY

  • 110. No part of any income or property of the Company shall be, directly or indirectly, paid or transferred as a profit, by way of a dividend or bonus or otherwise, to any shareholder.
  • 111. All the income and property of the Company shall be applied towards the objects of the Company as set out in the Memorandum of Association and not otherwise.
  • 114. If the Company is wound up and any surplus assets remain after payment of its debts and liabilities and the costs of winding up and repaying to shareholders the capital paid upon those shares, those surplus assets shall not be distributed amongst the shareholders, but shall be distributed or applied in such other manner as shall be determined by the liquidator, subject to prior confirmation from the Commissioner of Taxation that the distribution complies with the requirements of section 23(h) of the Income Tax Assessment Act 1936, or the equivalent section or sections in the then prevailing income tax legislation.

• 108 More importantly, by s 35A of the BHA 1967, distributions of profits or property among members are prohibited. The section is relevantly in the following terms:

• …

• 109 As a matter of history both the provisions of the BHA 1967 and those of the Memorandum and Articles of Association were framed as they are in order to secure the past agreement of the Commissioner that the requirement that CBH not be carried on for the profit or gain of its individual members was satisfied.
• 110 The Commissioner submits that notwithstanding the apparent inconsistencies between clause 4 on the one hand, and clauses 110, 111 and 114 of the Memorandum of Association and s 35A of the BHA 1967 on the other, ultimately they might not be interpreted to preclude distributions to members. "

70. In short, the primary judge was of the view that as CBH was not able to distribute its profits or assets among or apply its profits or assets to the individual benefit of its members but must apply them to the furtherance of its objects, it satisfied the negative criterion. Although his Honour recognised that cl 4 of the Memorandum of Association was anomalous (which did provide for distribution of dividends from past profits to members), s 35A of the BHA 1967 made very clear in its terms proscribing the distribution of profits or assets of CBH amongst its members and on the winding up, could only be distributed in such other manner as directed by the State treasurer. Further, his Honour concluded (at [ 121 ] ) that the fact that growers who are also members benefit from the activities of CBH not because they are members but because they are growers did not make CBH an association carried out for their individual profit or gain. If the principal or predominant purpose was made out, it did not matter that as subsidiary and incidental to the purpose, members also derived some personal benefit.

Consideration on appeal

Purpose

71. The Commissioner, in addressing the meaning of " established for the purpose of promoting the development of Australian agricultural resources " accepted that the expression needed to be understood in its entirety and within the context of the statute as a whole. However, in considering the expression in this way, meaning still needed to be given to the individual components within the expression but not in such a way that the individual parts of the expression assumed greater significance than the plain language of the expression as a whole. The Commissioner argued that once grain is produced and arguably delivered by the producer to the local reception point, what happens thereafter is not part of " agriculture " . Rather, it is the transportation and storage of agricultural produce.

72. This characterisation may be accepted but the expression " agricultural resources " is broader than " agriculture " . It may reasonably be understood to mean the range of resources available to facilitate and support agriculture. The Commissioner argues that agricultural resources are only those which have the potential to be used in agriculture per se, that is, planting, growing and harvesting grains and other crops. He argues that the development of those resources can be promoted by relevant research, agronomy or by promotion of methods of improved cultivation. The Commissioner argues that the means of transportation and storage after delivery by the producer do not form part of " agricultural resources " .

73. This approach of dissecting " agriculture " from " agricultural resources " does not give full meaning to the expression. What is to be " promoted " is not agriculture nor a specific agricultural activity but " the development of Australian agricultural resources " . Neither " agriculture " nor " agricultural " stands alone. The " development of agricultural resources " extends beyond cultivation of land as agriculture. The approach taken by the Commissioner does tend to construe individual words added together in contrast to reading the expression as an entirety. It is common ground that the purpose of CBH includes the provision of efficient grain handling. That is not confined to something done on the farm or nearby.

74. The Commissioner contended that there was no evidence that the operations of CBH disclosed an express purpose or object at any time since its foundation of promoting the development of Australian agricultural resources. The only activity that CBH engaged in was actual grain bulk handling. The only evident purposes were those directed solely at enabling CBH to provide an efficient grain bulk handling system to its shareholders and other users operating on a purely commercial basis.

75. On the Commissioner ' s argument, it was irrelevant that CBH may have contributed to the development of grain growing resources at the time of its foundation, when the bulk handling of grain was only just beginning to replace the handling of grain by bags. In this regard, the Commissioner also contended that CBH was now a " mature " business providing efficient progressive bulk grain handling not only by CBH but by competitors operating like CBH principally to carry on the business of bulk handling harvested grain in the most commercially effective way. Indeed, there had been recent removal of receiving points in less commercially profitable areas and the introduction of differential pricing or two tier charging which limited any cross-subsidisation of the less commercially profitable areas which changes reflected a purely commercial purpose rather than a statutory purpose which would entitle exemption. In addition to this, the Commissioner stressed that CBH carries on other business activities with substantial investments in other companies, some of which are wholly owned subsidiaries. The share of CBH group revenue and of group profit contributed by subsidiaries, associates and joint ventures were substantial according to financial statements revealing that those investors contributed more than 60 % of group revenue and group profit ( $ 380,949,000 of $ 581,458,000, for grain trading and marketing services).

76. All of these arguments show that CBH is being conducted efficiently and profitably but the profits are being invested back into areas of activity deemed by the Board to be consistent with the primary objective of promoting the development of the West Australian grain growing industry. CBH argues this equates with the development of Australian agricultural resources. The fact that CBH now derives more income from such sources than from direct supply of services to its members and others who produce and deliver grain is not inconsistent with the stated CBH aim of minimising the cost of providing those services to an amount necessary to achieve objectives without detriment to those requiring the services, in other words, its members and other grain deliverers.

77. The Commissioner argues that creating efficiencies in the operations of a mature bulk handling business may promote and maximise the commercial value of the bulk handling services to CBH ' s shareholders and other users but this does not amount to a predominant purpose of promoting the development of Australian agricultural resources if bulk handling operations and facilities are not themselves such agricultural resources. The difficulty with this general approach is that it dissects CBH ' s activities into separate categories and tests each separately against the narrower construction of " agricultural resources " . This is to overlook the fundamental question of whether CBH is " established for the purpose of promoting the development of Australian agricultural resources " . It substitutes it with a question of whether transactions conducted by CBH or a class of transactions would, separately considered, amount to " promoting the development of Australian agricultural resources " . The better approach is that all of the activity of CBH is to be taken into account in determining what is the principal or dominant purpose for which it is established.

78. Further, it is unhelpful to consider the contribution made predominantly by subsidiaries to CBH ' s revenue (60 % of group revenue) because the Act is considering the purpose of CBH not that of other companies of which it is a shareholder. In respect of those other companies, no exemption is claimed.

79. The central submission from CBH in characterisation of purpose is that the relevant Australian agricultural resource is the Australian grain industry and the principal purpose for which CBH is established is to promote the development of that industry. This characterisation stands in contrast to the Commissioner ' s submission that the purpose is simply the bulk handling of grain. It logically follows from the Commissioner ' s characterisation that he advances the argument that the bulk handling of grain is now a mature business. However, this submission would appear to reject the significance of the ongoing considerable advances made by CBH and summarised above under the " current activities " and " current income headings " .

80. The conclusion drawn by the primary judge as to purpose was correct. The totality of the discrete activities which continue to be undertaken by CBH are directed to promoting the development of the grain growing industry in Western Australia by its continual focus on:

• 1. improving the quality of grain both as grown and maintained through its delivery, storage and handling;
• 2. on securing its continued marketability so that production can be maintained and increased; and
• 3. on enhancing the reputation of wheat grown in Western Australia,

thereby advancing Australia ' s competitiveness in the grain export market. (The evidence showed that Western Australia produced 40 % of Australia ' s wheat).

81. The evidence supported the argument for CBH that with the advent of new markets, new crops, new land, new technology, new regulations and new methods, as well as the challenges facing CBH as evidenced by its long history and its current proposed activities are all evolutionary in character such that its business is continually open to development by advancement rather than having matured to the point of being static.

82. The fact that a non-profit making organisation makes a surplus which is reapplied towards its objects does not mean that it cannot satisfy the statutory requirements for exemption. Conducting activities in a commercially efficient and profitable manner does not mean they cannot be conducted principally for the purpose of promoting the development of Australian agricultural resources any more than it would if it was being conducted for charitable purposes. It is well established that the fact that the Act exempts income of a charitable institution from tax does not preclude it from deriving profits from activities. In fact, as observed in
Incorporated Council of Law Reporting (QLD) v Federal Commissioner of Taxation (1971) 125 CLR 659 at 670 (per Barwick CJ) " the very fact that the Act exempts the income of a charitable institution concedes that such an institution may derive profits from its activities " .

83. If the effectiveness of the activities conducted by CBH enables it to maximise the value of the operation, as contended by the Commissioner, maximising the value of the operation may well be consistent with the means of increasing resources available to be applied to the purpose for which it is established.

84. The subsidiary companies are separate taxpayers from CBH and do not claim exemption; they yield return to CBH through dividends, which are reinvested by CBH in its overall activities. The expansion of the activities of the tax-paying subsidiaries of CBH is not a reason to deny to CBH itself the benefit of s 50-1. Exemption is claimed only for the income of CBH. The subsidiaries ' trading profits are taxed as ordinary companies. There is neither in the language nor in the policy of the Act any reason to diminish the exemption of CBH by reason of their activities.

" Not carried on for the profit or gain of its individual members "

85. The Commissioner argues that the primary judge adopted too narrow an approach to the second issue. His Honour concluded that the activities of CBH were not carried on for the profit or gain of its individual members as " it cannot distribute its assets among or apply its assets to the individual benefit of its members, but must apply them to the furtherance of its objects " (at [ 119 ] ).

86. This approach, the Commissioner says, compounds an acceptable " non-distribution " requirement with actually meeting the requirements of the special condition in the second limb of item 8.2.

87. The Commissioner particularly focuses on " or gain " in the special condition in item 8.2. The Commissioner says that a corporate body is carried on for gain if it makes the profit or gain itself and distributes all or part of the gain to members and also if it successfully operates so that what would otherwise be included in its profits or gains are passed to its members " severally and individually " .

88. CBH assists or advances the interests of the activity concerned in the first limb and necessarily those involved in and with it. Such persons who may thus benefit may be members or may be persons who are not part of the membership of an association or society. What the negative requirement in the second limb ensures is that the taxation exemption is only available if the association is not carried on for the benefit or gain of individual members. Members may benefit along with others in the community but should not, by virtue of their membership alone, benefit more than others for whom the benefit of the activity is conducted.

89. The expression " carried on for the purpose of profit or gain to its individual members " differs from relevantly comparative expressions in other legislation and has not received a great deal of judicial attention. The question arises as to the role played by " individual " in the phrase. The decision (discussed below) in
Commissioner of Taxation v Cappid (1971) 127 CLR 140 addressed the issue but in a different context. In that case the question was whether a company was a " public company " or a " private company " under the 1936 Act which, relevantly to this appeal, involved interpretation of the same key expression in the second limb of the current legislation. In Cappid , however, there were only two shareholders, one being a corporate trustee and the other an individual who held his one share as nominee of the other corporate shareholder. The company paid one of the shareholders funds, not by way of dividend, but on account of rental of property and interest on a loan from the shareholder. At first instance, Menzies J held that the expression " for the purpose of profit or gain to its individual members " did not exclude corporate members and did include the gain made by a member through renting property even though that gain was not a distribution of profit. It was held that the expression did not, however, include those companies carried on for the profit or gain of the membership as a whole or where they were carried on for the profit or gain of a specified person or body who was not a member. Menzies J held that the relevant section could not be confined to companies established for charitable purposes. The memorandum of articles precluded distribution to members (and relatives of members). On appeal, the Full Court of the High Court disagreed.

90. The second limb of the requirements was explained by Barwick CJ in Cappid (at 153) where the Chief Justice said that the function of the word " individual " was not to import the idea of " personal " or " beneficial profit or gain " . His Honour said:

" Its function, in my opinion, is to exclude from the operation of the paragraph those incorporated companies and unincorporated associations ( … ) which are carried on for the profit or gain of the membership as a whole and those which are carried on for the profit or gain of some specified person or body not being a member. "

91. The Chief Justice emphasised that the focus was on corporations carried on for the benefit of their members but not for the profit or gain of their members severally or individually. At 154, the Chief Justice said:

" Upon the facts I have mentioned there is no room to doubt that the company was carried on for the purposes of profit or gain. Then for whose profit and gain has the taxpayer been so carried on? No body or person has been nominated by the memorandum and articles of association of the taxpayer as the person or body for whose benefit or to whose account such profit or gain must be paid or be made available . " (emphasis added)

92. Commenting on these passages in
Nadir Pty Ltd v Federal Commissioner of Taxation (1973) 129 CLR 595 , Gibbs J, after commenting on that passage in Cappid explored the meaning of the expression in the second limb in this way (footnotes omitted):

" It was further held in that case that in considering the application of the first limb of para. (c) the court is not ' concerned " with purposes " in the sense of the subjective intention of the shareholders or of those who caused the taxpayer to come into existence ' but ' with the objective conclusion to be drawn from the circumstances of the operation of the company ' (per Barwick C.J.). In that case the company had in fact been carrying on a business and had been earning and accumulating very considerable profits and it was held that there was no room to doubt that the company was carried on for the purposes of profit or gain. The further question that there arose, and that gave rise to the real dispute in the case, was for whose profit or gain the company had been carried on. The memorandum and articles there under consideration did not nominate any person or body as the person or body for whose benefit any profit or gain must enure, but, as Barwick C.J. pointed out, normally a company which is trading for profit is carried on for the purposes of profit or gain to its individual members . It was held that it had not been established that the company had not been carried on since its incorporation for the purposes of profit or gain to its individual members, and in this regard it was mentioned that " whenever any distribution of the profits or gains of the taxpayer takes place it must be either to or upon the order of the shareholders " . Similar reasoning would lead to the conclusion that if it is right to hold that the taxpayer in the present case has been carried on for the purposes of profit or gain, it should also be held that it was carried on for the purposes of profit or gain to its individual members. The articles here differ in some respects from those considered in Cappid ' s case , but it remains true to say that no one is nominated as the person for whose benefit any profit or gain must be paid or made available, and that if a distribution of profits or gains were to take place upon a winding-up it would be within the power of the shareholders to direct the application of those profits or gains for their own benefit (e.g., to a company formed in their interests) even though they themselves could not directly participate in the distribution (see art. 74). The crucial question in the case then becomes whether the taxpayer was carried on for the purposes of profit or gain. "

93. With CBH, however, a combination of the terms of the articles and the governing statute would preclude the possibility of profit or gain going to the members before or after a winding up.

94. Providing the purpose identified by the first limb is established, then, if as a consequence of pursuing the purpose, the members derive a benefit or gain (as in this case they clearly do), that gain or benefit will not preclude exemption unless it is a gain produced only by reason of individual membership. In those cases where it is clear that the first limb purpose is directed to a broader community objective than just to the individual members, the incidental gain or benefit achieved as a member does not disentitle exemption for the association because that incidental gain or benefit is not received by reason of membership but is received in conjunction with all grain growers in Western Australia whether members or not. That benefit is received from the application of revenue or profits of CBH being applied to research, quality control in grading storage and handling, and through the facilities developed to serve and secure markets for grain grown in Western Australia. There is no differential charge imposed by CBH for its services, depending on whether the grower is or is not a member.

95. In all cases of exemption, it must be the position that it is not open to the body to disburse any profits or dividends to members. Statute prevents that course being pursued in the case of CBH. The BHA 1967 (s 35A) expressly imposes obligations on CBH which reflect an intention that its functions serve a broader community than those of the immediate individual members alone. While it is true that most grain growers/deliverers in Western Australia are members of CBH and it is also true that the efficiency of CBH will produce financial benefits for growers and others affected by the grain industry, members of CBH do not gain that benefit or gain solely by being members. They could be grower/deliverers and not be members and achieve the same gain or benefit.

96. On the approach taken by the courts to this and similar legislation, that is sufficient to satisfy the second limb of the requirement under the statutory test for exemption. A case which comes closest to the point for which the Commissioner would argue is an Administrative Appeals Tribunal ( the AAT ) case,
Tribunal Case 80 (1987) 18 ATR 3579 (discussed below), concerning sugar cane farmers in Queensland but the approach taken by the AAT in that case, as reflected in one of the subsequent AAT decisions, was to recognise that the body was carried on for the benefit of its individual members (a small group) because the purpose of the limited and specific activity carried out by that body was directed expressly to obtaining an immediate gain for the individual members. The other cases discussed below reveal that where a broader purpose prevails, incidental benefits to members including specific benefits created by the body to induce membership, would not fall within the second limb so as to disentitle exemption. It is to be acknowledged that the bodies concerned in earlier cases did not attract revenue of anything like the same dimension as that of CBH. But the size and nature of the revenue activity, on the authorities, appears more likely to fall for consideration in the broader question addressed in the first limb of the statutory test.

97. Turning to the handful of other authorities which might throw light on the meaning of the second limb, the first case approached the question just as the primary judge did in
South Australian Cooperative Bulk Handling Limited v Commissioner of Taxation , being a Taxation Board of Review decision on 24 December 1959, Reference number M.49/1959, (at [ 25 ] ) the Board said:

• " 25. I turn now to consider whether a company is " not carried on for the purposes of profit or gain to the individual members thereof. " On the evidence before the Board it is clear that the members are not entitled to participate in any profits made by the company. The company is prohibited by its articles from making either directly or indirectly any distribution of profits to members by way of dividend, bonus or otherwise; nor are the members entitled to participate in any distribution of surplus upon the winding up of the company. The articles specifically state that " the income and property of the company shall be applied towards the objects of the Company. " It should therefore be held I think that the company passes the second test laid down in s.23(h). "

98. Further in
South Australian Cooperative Bulk Handling Limited v Commissioner of Taxation , the Board noted that evidence was given that the operations of the company from the point of view of the industry generally, had had most beneficial effects. In particular, the turnaround of ships was substantially faster, labour and handling costs had decreased and there had been a saving of expense of corn sacks. The result was the provision of a larger surplus in the hands of the Australian Wheat Board for distribution to wheatgrowers throughout the Commonwealth. In addition, the company in the 1956-1957 and following seasons has sorted and classified wheat to meet the requirements of overseas buyers. It was also said that the operation of the bulk handling systems would lead to the growing and marketing of an improved quality of wheat. The member said:

" It would be surprising if individual growers themselves did not benefit from the installation and operation of the system by the company; indeed, the evidence was that they did so benefit. But in my view, the facts lead inevitably to the conclusion that the general purpose and effect have been the development and advancement of the wheat-growing industry in Australia. "

99. In other words, the Taxation Review Board in relation to the comparable body in South Australia was of the view that simply the existence of the prohibition on the members being entitled to participate in any profits made by the company was sufficient to satisfy this test.

100. At a more modest level still, in
Inland Revenue Commissioners v Yorkshire Agricultural Society (1928) 1 KB 611 , the Society which had been formed over 90 years earlier held annual meetings for exhibiting farming stock and such like and for the general promotion of agriculture. Its members did derive benefits including financial benefits of discounts on various services provided by the Society such as the analysis of manures and food stuffs at reduced fees. Its income was derived from services given including entry fees and gate receipts, local subscriptions for prizes, interest on investments and subscriptions of members. Any income over expenditure was invested and in the event of losses, the loss was met by sale of investments. The Society was assessed to income tax on the income of its invested funds. The Special Commissioners concluded that the Society was established for charitable purposes only and allowed its claim for exemption. Rowlatt J reversed that decision on appeal concluding that the objects of the Society were partly objects for the benefit of the members only. The Court of Appeal allowed an appeal. Lord Hanworth MR considered (at 620) that the benefits to the members in the form of various privileges attaching to membership of the Society could be disregarded. The fact that benefits accrued to members of the Society did not detract from the fact that the Society had been established for the purpose of improvement of agriculture as a whole and not for any confined purpose of benefiting only the particular members of the Society or those resident in the locality to which its name attached. Atkin LJ also allowed the appeal. His Lordship said (at 631):

" There can be no doubt that a society formed for the purpose merely of benefiting its own members, though it may be to the public advantage that its members should be benefited by being educated or having their aesthetic tastes improved or whatever the object may be, would not be for a charitable purpose, and if it were a substantial part of the object that it should benefit its members I should think that it would not be established for a charitable purpose only. But, on the other hand, if the benefit given to its members is only given to them with a view of giving encouragement and carrying out the main purpose which is a charitable purpose, then I think the mere fact that the members are benefited in the course of promoting the charitable purpose would not prevent the society being established for charitable purpose only. "

101. Lawrence LJ agreed holding that the crucial question was whether the Society was established for the promotion of agriculture generally or was established for the promotion of the interests of its members and their respective businesses. His Lordship noted (at 637) first that the Solicitor-General had argued that the society was a members ' society because the society was originally founded for the main purpose of holding an annual show primarily for the pleasure and benefit of its members and, secondly, that the Society did in fact confer privileges and personal benefits upon its members. He held that the first ground was not established on the proper construction of the founding resolutions. As to the second, the objects of society on the one hand and the inducements in the shape of personal benefits held out to persons in order to procure their membership and to obtain their subscriptions on the other are two entirely different things:

" It is a common thing for a charitable institution to offer all kinds of privileges and benefits which are in no sense charitable in order to obtain funds for the purpose of carrying out its objects … Many charitable institutions, in return for annual subscriptions or donations, offer special benefits to the persons who become their members. None of the operations of this kind results in making the purposes of the institution non-charitable. "

102. Similarly, many years later in
Incorporated Council of Law Reporting for England and Wales v Attorney-General and Others [ 1972 ] 1 Ch 73 , the Court of Appeal held that it was immaterial that the publication of the reports (in circumstances where profit could not be returned to members) also supplied professional men with the tools of their trade. Russell LJ said (at 86-87) (footnotes omitted):

" It was next contended for the Commissioners of Inland Revenue that a main purpose, even if not the only main purpose, of the association is to advance the interests of the legal profession by supplying it with the tools of its trade. Reference hereunder was made to the fact that the association and its unincorporated predecessor were brought into being by members of the legal profession: to the fact that it is to be supposed that the main body of " consumers " would be such members: to the fact that Scrutton J. in
Smith v. Incorporated Council of Law Reporting for England and Wales [ 1914 ] 3 K.B. 674 , 681 (very much by the way) remarked that the association " publish The Law Reports for the benefit of the profession " : and to the fact that Lord Simonds ' Law Reporting Committee appointed by Viscount Caldecote L.C. in 1940 contained this reference to the aims of the association:

' No other purpose was to be served than to produce the best possible reports at the lowest possible price for the benefit of the profession and of the public at large. '

To this may be added the comment of Professor Goodhart, a member of that committee, that the committee recommended continuance of The Law Reports in their established form " as they perform an essential function for the legal profession. " I am not persuaded of the validity of this contention. It seems to me that if the publication of reliable reports of decisions of the courts is for the benefit of the community and of general public utility in the charitable sense, it is an inevitable and indeed necessary step in the achievement of that benefit that the members of the legal profession are supplied with the tools of their trade . I do not see how the benefit to the public, assuming it to be a charitable object, could otherwise be achieved. So it would be if there were a non-profit-making association under gratuitous professional supervision for the production at moderate expense of pure medical drugs or efficient surgical instruments. But the only main object or purpose in such case would be, it seems to me, the relief of the sick. We were in this connection referred to a number of cases, some on one side of the line and some on the other, where the question was whether a main object was the promotion of the interests of a professional body or organisation. I do not find these helpful. Here the association consists of members who as such can derive no conceivable benefit from their gratuitous supervision of the activities of the association. Nor to my mind is the contention now under consideration fortified, as was I think at least at one stage in argument suggested, by the fact that clause 3 of the memorandum of association does not open with the words: " The objects for which the association is established are to advance and promote the proper development of law by the following means: " .

Accordingly I reject the contention that the association is not established for purposes which are exclusively charitable in so far as that contention is based upon the submission that a main purpose or object is to supply members of the legal profession with tools of their trade. " (emphasis added)

103. The Commissioner refers to two decision of the AAT which are said to have persuasive force for the argument the Commissioner advances. In Case 80 , the AAT considered whether a company formed to provide bridging finance for a water storage project was exempt from income tax under the former s 23(h) of the 1936 ITA Act. The membership of the company was limited to sugar cane growers in a defined area in Queensland assigned to a particular mill. The members were levied for initial capital. The company was established to facilitate the early construction of the water storage by borrowing money to contribute to the cost of the project until Government funds became available. Everything it did was directed to that end. It had no other purpose and played no other part in the construction of the water storage. The AAT found (at [ 37 ] - [ 38 ] ) that there never was any intention of making a " profit " for the members. In concluding that the company was nevertheless carried on for the purposes of " gain " to its members and was outside the terms of s 23(h) (at [ 43 ] ), the AAT held that " gain " means the improvement, benefit or advancement obtained and includes other considerations of value obtained and was something wider than " profit " which requires the improvement, benefit or advancement obtained be quantifiable in some way (at [ 41 ] ). The AAT decided (at [ 40 ] ) there was a " gain " to the individual members of the company as:

• (a) The purpose of the applicant was to obtain increased available water storage for its members and this additional water storage was obtained earlier than it would have been provided if Government financing had been relied upon;
• (b) As part of the agreement with the Queensland Government the members of the company achieved additional water allocations at concessional rates of payment to the Government.

104. Significantly and unlike CBH, the persons who were entitled to be members were an exceptionally limited class. Clauses 5 to 12 of the constitution had the effect of limiting membership to sugar cane growers in the defined area who were assigned to a particular mill. It was a specific class of members related to a specific mill who were contributing the initial capital to build a weir on the river which would service that mill. When they were finished building the weir, any surplus from doing so was to be returned to them. They wanted the weir built quickly; the Queensland Government was not prepared or willing to advance the requisite funds immediately, so they put in the money themselves and were to be repaid by the Queensland Government in due course.

105. However, unlike the applicant in Case 80 , statutory requirements compel CBH to act not only in the interests of its members but also in the interests of the members of the grain industry as a whole. Under the BHA 1967 CBH is obliged to provide services and facilities including receiving all grain delivered to it (s 42) whether from members or others. It is required to deliver the same quantity and type of grain to all buyers (s 44) and to issue weighbridge tickets and warrants (s 36 and s 37). The warrants enable growers and others to trade grain and take delivery under the bulk system. CBH does not obtain title to the grain. It is obliged to test grain and to determine the standards of grain (s 43) and to ensure grain which is delivered (s 11). It is required to satisfy the Government of Western Australia in relation to those matters by forwarding balance sheets and revenue accounts to the minister for tabling in Parliament and to give the Auditor-General access to its books (s 12). It is obliged at law to apply its surpluses to the purposes for which it was established not by way of distribution amongst its members (under s 35A which has been discussed). The extent of obligations and scrutiny imposed on CBH are rather more consistent with those which might be expected of a public authority rather than a privately owned company with a small membership established for a short term single purpose operation.

106. The second case to which the Commissioner refers is
AAT Case 9723 (1994) 29 ATR 1102 . There the AAT considered whether an association of surveyors was exempt from income tax under the former s 23(h) of the 1936 ITA Act. The AAT was satisfied that the association was not carried on for the profit or gain of its individual members and while the members did benefit, it was not in the sense in which " profit " or " gain " appear in s 23(h). The benefit they received was the usual benefit that arises with all professionals who belong to a body which looks after the interests of their profession such as the coordinating of professional education, promoting the profession and lobbying for the profession. Such gains are not quantifiable in any commercial sense although pursuing those ends improves the professional standing and business prospects of the members. The AAT concluded this position was different from that of the members of the company in Case 80 where the whole purpose of the formation of the association and the arrangements made by the company for additional water storage facilities was for growers to get access to additional water storage for their commercial operations and also to get water at a discounted price, which benefits were entirely to do with the commercial operations of the growers and of gain to the members and was a quantifiable gain in commercial terms (at [ 22 ] ).

107. The Commissioner argues that CBH ' s operations are conducted on a commercial basis and have provided substantial assets and income. CBH does provide value-adding services for its members by way of modernised storage facilities, research facilities, and new technologies together with its investment in subsidiaries pursuing a range of other activities. For decades CBH ' s strategy has been that its returns flow so as to decrease the costs to growers. Members severally and individually derive gains from CBH cost effectively handling the grain they have produced. These are gains directly connected to the members ' individual commercial operations. These gains, the Commissioner argues, are not incidental benefits.

108. That there has been substantial growth in the quantity and nature of activities of CBH cannot be doubted. The expansion and improvement of grain handling facilities and techniques and research and development activities and the " Grain Express " initiative cannot be ignored. They are part of the whole of CBH ' s activities which are to be examined in ascertaining the purpose for which it is established. In this regard, the statutory prohibition on distribution or application of its assets for the benefit of its members, while not being determinative, is clearly an important consideration.

109. It is not enough to attract the disqualification in the second limb special condition that members benefit or gain from the activities of CBH. It is entirely conceivable that every organisation which is legitimately entitled to the exemption afforded under s 50-40 of the Act achieves a benefit to its members, incidentally or otherwise. That in turn is entirely consistent with the very purpose of the organisation being established and being given exemption.

110. It is important in construing the second limb not to overlook the word " individual " in relation to members. That the activities of CBH enable the grain industry in Western Australia as a whole (not even just the growers) to flourish does not mean that it is carried on for the profit or gain of individual members.

111. In contrast with the cases relied upon by the Commissioner ( Cappid and the two Tribunal cases), the collateral benefits there arising were afforded only to the members of the companies concerned. In contrast, by statute, CBH must make its facilities available to any producer of grains whether or not a member (ss 19, 42 and 17 of the BHA 1967). Equally, the development activities described at [ 47 ] - [ 49 ] enure for the benefit of the industry as a whole not solely for members of CBH.

112. While members do benefit from the activities of CBH, in its grain handling and storage activities, they do so to no greater extent than, and have no preference over, non-members who deal with the company, and in these circumstances such benefits do not accrue to them as " individual members " .

113. It follows that CBH is not carried on for the " profit or gain of its individual members " .

Conclusion

114. CBH has advanced considerably since its inception both in techniques, diversity of activity and income generation. It is now an organisation that generates so much income that reasonable minds may question why it should be exempt from taxation liability. However on examination of whether it meets the statutory tests, the measure is not the size of its turnover or taxable profit by subsidiaries. Rather the test is what it does and why. State legislation and its own constitution constrain its activity so that as a company it must " insure [ sic ] that proper service [ is ] given to the growers of wheat and to merchants and millers and all other persons concerned in its marketing and disposal " (BHA 1935). The BHA 1967 made " better provision for the bulk handling of grain by the Company registered as Co-operative Bulk Handling Limited, and for incidental and other purposes " . Although methods change with modern techniques and science, the fundamentals or the core business and the purpose of CBH has remained unchanged since its inception.

115. There is no reason to conclude there was any error on the part of the primary judge in being satisfied that notwithstanding the diversity of its activities and the substantial funds generated by those activities, within the relevant taxation income years, CBH was established for the purpose of promoting the development of Australian agricultural resources and was not carried on for the profit or gain of its individual members.

116. We would dismiss the appeal with costs.