ATO Interpretative Decision

ATO ID 2002/861

Income Tax

Whether repayment of monies loaned by Government to the taxpayer will be an allowable deduction?
FOI status: may be released
Status of this decision: Decision Current

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Whether funds applied by a Co-operative company towards the repayment of monies loaned by the government will be an allowable deduction under paragraph 120(1)(c) of the Income Tax Assessment Act 1936 ('ITAA 1936')?

Decision

Yes. Repayment of monies loaned to a co-operative company by the government will be an allowable deduction under paragraph 120(1)(c) ITAA 1936. The application of the monies must occur within the year in respect of which the deduction is claimed. Any repayments in excess of the total assessable income of the year in which they are made would not be an allowable deduction.

Facts

A co-operative company entered into a loan facility with the government to fund capital works . The co-operative company plans to apply assessable income from its activities for repayment of the monies loaned by the government.

Under the terms of the facility letter, the government has consented to the prepayment of the principal of the loan on the condition that the co-operative company provide an auditor's certificate as to the solvency of the co-operative company at the time of each payment.

Reasons for Decision

Paragraph 120(1)(c) (ITAA 1936) states as follows:

'[Bonuses, dividends etc allowable deductions] So much of the assessable income of a co-operative company as:

(a)
...

(b)
...

(c)
in the case of a company having as its primary object that specified in paragraph 117(1)(b)-is applied by the company for or towards the repayment of monies loaned to the company by a government of the Commonwealth or a State to enable the company to acquire assets which are required for the purpose of carrying on the business of the company or to pay that government for assets so required which the company has taken over from that government;

shall be an allowable deduction:

Provided that the deduction under paragraph (c) shall not be allowed unless shares representing not less than 90% of the value of the company are held by persons who supply the company with the commodities or animals which the company requires for the purposes of its business.'

To be defined as a co-operative company for the benefit of the deduction, the company will need to fulfil the requirements of section 117 ITAA 1936, which defines a co-operative, and section 118 ITAA 1936, which describes the circumstances in which a co-operative will not be treated as a co-operative company in a particular year of income.

Sub-section 117(1) ITAA 1936 defines a co-operative as:

' ...a company... the rules of which limit the number of shares which may be held by, or by and on behalf of, any one shareholder, and prohibit the quotation of the shares for sale or purchase at any stock exchange or in any other public manner whatever...and which in either case is established for the purpose of carrying on any business having as its primary object or objects one or more of the following:

(a)
...

(b)
the acquisition of commodities or animals from its shareholders for disposal or distribution...'

Section 118 ITAA 1936 deems a co-operative company not to be a co-operative company for a year of income if:

'...the value of the commodities and animals disposed of to, or acquired from, its shareholders by the company...is less respectively than 90% of the total value of commodities and animals disposed of or acquired by the company...that company shall in respect of that year be deemed not to be a co-operative company.'

The co-operative company satisfies the requirements of section 117 ITAA 1936 and section 118 ITAA 1936. Repayment of monies loaned to the co-operative company will be an allowable deduction under paragraph 120(1)(c).

Date of decision: 30 November 2001

Year of income: 31 December 2001

Legislative References:
Income Tax Assessment Act 1936
   Paragraph 120(1)(c)
   Section 117
   Section 118

Keywords
Co-operatives
Borrowings & loans

Siebel/TDMS Reference Number: DW321010

Business Line: Public Groups and International

Date of publication: 23 August 2002

ISSN: 1445-2782

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