Edited version of private ruling

Authorisation Number: 1011632480366

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Ruling

Subject: Co-operative companies

Question

Does the 90% test in section 118 of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the Company as a legal entity, or only to the Company's permanent establishment in Australia?

Advice/Answers

The 90% test in section 118 of the ITAA 1936 applies to the Company as a legal entity. The test applies to all of the Company's operations, including its overseas operations and the operations of the Company's permanent establishment in Australia.

This ruling applies for the following period

Year ended 31 May 2008

Year ended 31 May 2009

Year ended 31 May 2010

Year ended 31 May 2011

The scheme commenced on

The scheme has commenced.

Relevant facts

The Company was incorporated in Country X and is a resident of Country X for tax purposes.

The Company acquired a business in Australia from Company A. The Company now operates this business through its existing structure.

The Australian business is a permanent establishment of the Company within the meaning of the Income Tax Assessment Acts and the Country X tax treaty.

The Company has shareholders resident in Australia and Country X.

The Company manufactures and acquires products for sale in both Country X and Australia.

Reasons for decision

Division 9 of Part III of the ITAA 1936 comprises sections 117 to 121 and deals with the taxation treatment of co-operative and mutual companies.

Subsection 6(1) of the ITAA 1936 states that 'company' has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), which defines 'company' as:

(a) a body corporate; or

(b) any other unincorporated association or body of persons;

but does not include a partnership or a non-entity joint venture.

The Company, being incorporated, is a body corporate and hence a company under the definition in subsection 995-1(1) of the ITAA 1997.

A company is taxed under Division 9 of Part III of the ITAA 1936 in relation to a year of income if it satisfies the requirements contained in sections 117 and 118 of the ITAA 1936 for that year. Subsection 117(1) and section 118 of the ITAA 1936 only apply to an entity that is a 'company'.

Subsection 117(1) of the ITAA 1936 defines 'co-operative company' in part as follows:

In this Division, ''co-operative company'' means a company…which is established for the purpose of… (emphasis added)

Section 118 of the ITAA 1936 requires, broadly, that at least 90% of the co-operative company's business is transacted with its own shareholders. Section 118 states:

COMPANY NOT CO-OPERATIVE IF LESS THAN 90% OF BUSINESS WITH MEMBERS

If, in the ordinary course of business of a company 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, is less respectively than 90% of the total value of commodities and animals disposed of or acquired by the company, or of its receipts from the storage, marketing, packing and processing of commodities, or from the rendering of services, or of the total amount lent by it, that company shall in respect of that year be deemed not to be a co-operative company (emphasis added).

Section 118 of the ITAA 1936 tests transactions between the company and its shareholders. Australia's tax legislation does not, either expressly or by implication, require the meaning of 'shareholder' to be limited to only Australian shareholders or only foreign resident shareholders, for the purpose of Division 9 of Part III of the ITAA 1936. Therefore in the case of the Company, 'its shareholders' pursuant to section 117 of the ITAA 1936 means all of the Company's shareholders.

Section 118 of the ITAA 1936 operates in conjunction with section 117 of the ITAA 1936 to determine the co-operative status of an entity for the purposes of Division 9 of Part III of the ITAA 1936. Where an entity satisfies the requirements of section 117, it will not be a co-operative company in a year of income for the purpose of Division 9 unless it also satisfies the requirements of section 118.

There is nothing in the definition of 'company' in subsection 955-1 of the ITAA 1997 which expressly or impliedly limits it to Australian companies, or to the Australian operations in a situation where the company itself is a foreign company. Further, there is nothing in Division 9 of Part III of the ITAA 1936 or elsewhere which gives the term 'company' a different meaning for the purpose of Division 9.

Subsection 6(1) of the ITAA 1936 defines 'permanent establishment' in part as 'a place at or through which the person carries on any business', and defines 'person' to include a company. It follows that a place where the company carries on its business may be a permanent establishment of the company. A permanent establishment of a company is not a separate legal entity.

The definition of 'permanent establishment' does not require the term 'company' in Division 9 of Part III of the ITAA 1936 to have a different meaning where a company established in one country has a permanent establishment in another country.

The business or transactions of the company

Section 118 of the ITAA 1936 relates to transactions of the company, such as disposing of or acquiring, animals or commodities. The section and its heading also use the term 'business' in reference to these transactions.

The term 'business' is non-exhaustively defined in subsection 995-1(1) of the ITAA 1997 to include 'any profession, trade, employment vocation or calling, but does not include occupation as an employee'. This definition is concerned with types of business, rather than with the business of an entity in the sense of the transactions of the entity. There is nothing in this definition that refers to location(s) of the business or transactions. Accordingly, this definition does not confine the term 'business' to business carried on by a non-resident through a permanent establishment in Australia.

There is nothing else in Australia's tax legislation which requires, either expressly or impliedly, that the business or transactions of a company, for the purpose of section 118 of the ITAA 1936, will be limited to the business or transactions which occur in Australia at or through the Australian permanent establishment.

Consequently, in the case of the Company, the relevant business or transactions will be all of its business or transactions in an income year provided that these are 'in the ordinary course of business' including that business referable to its Australian permanent establishment.

Note that for the purpose of section 118 of the ITAA 1936, any dealings between the Country X operation of the Company and the Australian permanent establishment will not be taken into account. The Country X operation and the Australian permanent establishment are part of the same entity, and an entity can not transact with itself.