Edited version of private ruling

Authorisation Number: 1011261243735

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Ruling

Subject: Commissioner's Discretion - subsection 120(6) ITAA 1936

Question:

Should the Commissioner exercise his discretion under subsection 120(6) of the Income Tax Assessment Act 1936 (ITAA 1936) to enable the co-operative, on the condition that it is a co-operative under Division 9 of the ITAA 1936, to deduct dividends to be paid to its members within five months after the end of each income year for the income years of 2009, 2010, and 2011 as if they had been made on 30 June at the end of each income year?

Answer: Yes

Relevant facts:

The Co-operative is incorporated under a State legislation.

You state that the co-operative is a co-operative company for the purposes of section 117 of the ITAA 1936.

You state that the co-operative does not fail the condition set out in Section 118.

You state that you intend to obtain a deduction under section 120(1)(b) of the ITAA 1936, and you do not intend to obtain any deductions under section 120(1)(c) of the ITAA 1936.

The co-operative's main activity is by way of a joint venture with other parties.

There is a service agreement where and an agency agreement between the co-operative and other entities.

It is stated in the co-operative rules that the annual financial reports are to be presented to co-operative members at the Annual General Meeting.

Under subsection 120(6) of the ITAA 1936 any co-operative company that distributes assessable income among its shareholders within three months from the end of a year of income will be entitled to claim the distribution as being made on the last day of the year of income.

The co-operative intends to pay shareholders the majority of its assessable income as unfranked dividends from the profits made in the year ended 30 June 2009.

In accordance with the State legislation and the rules of the co-operative, any dividend payments have to be approved at the Annual General Meeting.

Historically, the Annual General Meeting is held towards the end of October or in early November. This timeframe has been adopted by the co-operative to allow sufficient time for the completion of the annual audit of the financial statements and to coincide with a particular period tied to the operations of the co-operative. The annual general meeting coinciding with this period means that members are not inconvenienced and allows for more concise information relating to the upcoming harvest to be presented at the Annual General Meeting. The timing of the Annual General Meeting in late October and early November will be an ongoing feature.

The co-operative's proposed extension of time for the dividend payment will not affect its requirement to lodge an Income Tax Return.

Reasons for decision

Subsection 117(1) of the ITAA 1936 outlines the conditions that a co-operative company must comply with to fall within the meaning of Division 9 of the ITAA 1936. For subsection 117(1) of the ITAA 1936 to apply, the primary or dominant object of the business must be to serve the shareholders by acquiring their products or rendering some other of the specified services. If the dominant motive is merely to carry on a business for the purpose of making profits which are not divided on a recognised co-operative basis, the company would not be a co-operative company even though there is literal compliance with all the other conditions of Division 9 of the ITAA 1936.

In your case, you state that you are a co-operative company for the purposes of section 117 of the ITAA 1936. It is however, conducting its operations through a joint venture. This joint venture in its current form however will not affect the treatment of the co-operative as the dominant motive for this joint venture is to satisfy the primary objective of the co-operative. This is demonstrated by the objectives of the joint venture outlined in several documents you have provided.

Furthermore, pursuant to section 118 of the ITAA 1936, a company shall be treated as a co-operative company only where in the ordinary course of business, in the year of income, the value of commodities and animals disposed of to, or acquired from, its shareholders by the company, or the amount of its receipts from the storage, marketing, packing and processing of commodities of its shareholders, or from the rendering of services to them or the amount lent by it to them amounts to at least 90% of the aforementioned transactions. In your case, you have confirmed that you satisfied the criterion in section 118 of the ITAA 1936 for the 2009 income year.

Pursuant to subsection 120(6) of the ITAA 1936, if a co-operative company distributes assessable income amongst its shareholders within the period of three months starting at the end of a year of income, the co-operative company may elect that this distribution is to be taken, for the purposes of section 120 of the ITAA 1936 only, to have been made on the last day of that year of income. The Commissioner has discretion to extend this three month grace period.

It is noted in the Imputation reference guide - A guide to imputation for businesses and their advisers that the deduction under subsection 120(1) of the ITAA 1936 is limited to the unfranked part of the distribution that is funded from assessable income.

In your case, the following factors were taken into consideration to determine the exercise of the Commissioner's discretion to provide an extension beyond the three month period for the purposes of subsection 120(6) of the ITAA 1936:

· the length of the extension being requested;

· the extent to which claiming the deduction in the previous income year would decrease the co-operative company's taxable income and income tax liability, or increase the co-operative company's tax refund;

· the size of the co-operative company in terms of sales turnover, the number of shareholders, and the region/s of operation;

· the nature of the business conducted by the co-operative company;

· whether the co-operative company is required to have its accounts and financial reports audited and the length and completion date of the audit process;

· the time taken to publish the audited financial reports and to send them to the shareholders of the co-operative;

· whether the shareholders of the co-operative company are required to ratify the payment of rebates, bonuses, interest and dividends at an Annual General Meeting and the time within such meeting must take place as prescribed by relevant State legislation;

· the time taken to arrange the Annual General Meeting and the processes involved in arranging it;

· the date on which shareholders of the co-operative company were given notice of the Annual General Meeting and the notice period prescribed by relevant State legislation for such meeting;

· the date the relevant rebates, bonuses, interest or dividends were paid to the shareholders of the co-operative company and the length of time between ratification of the relevant rebates, bonuses, interest or dividends at the Annual General Meeting and payment thereof;

· whether there are circumstances beyond the control of the co-operative company and these circumstances could clearly not be predicted; and

· whether there are special circumstances by reason of which it would be fair and reasonable to treat the rebates, bonuses, interest and dividends as being paid on the last day of the previous income year.

As your unfranked dividend payments have to be approved at the Annual General Meeting due to the requirements stated under the State legislation, and as it would be inconvenient to hold the Annual General Meeting at an earlier point in time due to the timeframe that has to be allowed for the annual audits of the co-operative's financial statements, the Commissioner hereby exercises the discretion provided under subsection 120(6) of the ITAA 1936 to enable the co-operative to deduct the dividends to be paid within a period of five months following the end of the respective income year as if they had been made on the end of the respective financial year.

Note:

Subject to Taxation Ruling, TR 96/D14, it is necessary to analyse the activities carried on by a co-operative company on a year to year basis to determine the primary object or objects of the business. This analysis may alter the company's status from year to year. As such, deductions under section 120 of the ITAA 1936 will only apply if the co-operative remains a co-operative company under Division 9 of the ITAA 1936 in the respective income year.