Edited version of private ruling

Authorisation Number: 1011791529302

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Income tax - co-operative company - deductions

Question 1

Is the taxpayer a co-operative company as defined in subsection 117(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: Yes.

Question 2

Does section 118 of the ITAA 1936 apply so that the taxpayer is deemed not to be a co-operative company?

Answer

No. Provided that the taxpayer continues to satisfy the 90% requirement in section 118 of the ITAA 1936, section 118 of the ITAA 1936 will not apply to deem that the taxpayer is not a co-operative company.

Question 3

Is the taxpayer entitled to a deduction under paragraph 120(1)(c) of the ITAA 1936 for so much of their assessable income that is applied for or towards the repayment of loans obtained from Commonwealth or State governments?

Answer

Yes. Provided that the taxpayer continues to satisfy the 90% requirement in paragraph 120(1)(c) of the ITAA 1936, the taxpayer will be entitled to a deduction under paragraph 120(1)(c) of the ITAA 1936.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The taxpayer is an unlisted public company.

The taxpayer acquires most of its produce from its shareholders.

The table below summarises the percentage of produce delivered by shareholders and non shareholders (by value) and the percentage (by value) of shares held by members who delivered produce to the taxpayer. The figures for the year ended 30 June 2009 are final. The figures for the years ended 30 June 2010 and 30 June 2011 are estimates as payments by the taxpayer have not yet been finalised.

The taxpayer stores and controls all the produce before distributing it to local and overseas markets. The taxpayer is under capitalised and relies on grower balances to fund its working capital.

The taxpayer has a focus on maximising returns to growers and has minimal retained earnings. Any retained earnings are spent mainly on minor or routine capital replacements. The bulk of the difference between the taxpayer's total revenue and total costs each year is returned to growers in the form of crop payments.

The taxpayer also 'value adds' to some of the produce acquired by further processing it.

The taxpayer's constitution specifies, among other things, as its primary objects the acquisition of produce from its members for disposal or distribution and the storage, processing, packing and marketing of the produce of its shareholders.

The taxpayer's constitution limits the shareholding.

The taxpayer's constitution prohibits the quotation of the taxpayer's shares on any stock exchange.

The taxpayer's constitution states that the directors may refuse to transfer any shares if the transferee is not a genuine grower as determined by the directors.

The taxpayer is currently negotiating to borrow money from government organisations.

Relevant legislative provisions

Income Tax Assessment 1936 Section 117

Income Tax Assessment 1936 Subsection 117(1)

Income Tax Assessment 1936 Section 118

Income Tax Assessment 1936 Section 120

Income Tax Assessment 1936 Paragraph 120(1)(c)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the taxpayer.

Question 1

Summary

The taxpayer is a co-operative company as defined in subsection 117(1) of the ITAA 1936.

Detailed reasoning

Subsection 117(1) of the ITAA 1936 defines a 'co-operative company' for the purpose of Division 9 of Part III of the ITAA 1936. A co-operative company has to satisfy the following conditions:

· it is not a friendly society dispensary;

· the rules of the company limit the number of shares that may be held by shareholders;

· the rules of the company prohibits the quotation of shares for sale or purchase at any stock exchange or in any other public manner whatever;

· the company is established for the purpose of carrying on any business having as its primary object or objects one or more of the following:

(a) the acquisition of commodities or animals for disposal or distribution among its shareholders;

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

(c) the storage, marketing, packing or processing of commodities of its shareholders;

(d) the rendering of services to its shareholders;

(e) the obtaining of funds from its shareholders for the purpose of making loans to its shareholders to enable them to acquire land or buildings to be used for the purpose of residence or of residence and business.

In considering the primary object or objects of a business, Taxation Ruling TR 1999/14 provides two questions needed to be asked:

· what business or businesses is the company carrying on?

· what is/are the primary object/objects of each business?

Paragraph 8 of TR 1999/14 states that whether a company satisfies the requirements of subsection 117(1) of the ITAA 1936 depends upon its activities during the year of income. A company may engage in several distinct businesses. Each of these businesses may have one or more primary object or objects. If any of those businesses have a primary object which does not come within the scope of the objects listed in paragraphs (a) to (e) of subsection 117(1), the company does not qualify as a 'co-operative company'.

Application to the taxpayer's circumstances

The taxpayer is not a friendly society dispensary. The taxpayer's constitution limits the number of shares which can be held by any one shareholder and prohibits quotation of its shares for sale at any stock exchange or in any public manner.

The taxpayer's objective is to carry on the business of trading in and processing of the produce it acquires from its members for its members. The taxpayer's business activities include:

· the acquisition of produce from its shareholders for disposal or distribution to both local and overseas markets; and

· the storage, processing, packing and marketing of the produce for grower shareholders.

Accordingly, the taxpayer meets the definition of a co-operative company under subsection 117(1) of the ITAA 1936.

Question 2

Summary

Provided that the taxpayer continues to satisfy the 90% requirement in section 118 of the ITAA 1936, section 118 of the ITAA 1936 will not apply to deem that the taxpayer is not a co-operative company.

Detailed reasoning

Section 118 of the ITAA 1936 describes the circumstances in which a company that fulfils the requirements of section 117 of the ITAA 1936 will not be treated as a co-operative company in a particular year of income.

Section 118 of the ITAA 1936 will deem a company not to be a co-operative company in an income year in which the value of commodities completed under one or more of the objects set out in subsection 117(1) of the ITAA 1936 with its members is less than 90% of the total value of its business under the respective object(s).

In paragraph 2 of Case H25, 76 ATC 185; the Chairman, JL Burke, explained that satisfaction of section 117 of the ITAA 1936 is not the end of the matter and the requirements of section 118 of the ITAA 1936 must then be met:

Provided the company satisfies the above definition and meets the requirements of section 118, namely that (in general terms) ninety per centum of its business in the income year be with its members, important concessions flow to it........

In the same case, CF Fairleigh QC even added that:

Section 117 of the Act and other sections presently relevant enjoin a co-operative society from doing certain things and there is the sanction that the privileged tax position will be lost upon breach of those requirements.

Thus, even if section 117 of the ITAA 1936 is satisfied, a co-operative may lose its privileged tax position if the requirements of section 118 of the ITAA 1936 are not met.

Application to the taxpayer's circumstances

The information provided by the taxpayer confirms that for the year ended 30 June 2009 97.3% of produce delivered (by value) was delivered by shareholders and 2.7% of produce delivered (by value) was delivered by non-shareholders. It also confirms that members who delivered produce held 93.6% of shares (by value).

The taxpayer has estimated that for the year ended 30 June 2010 99.2% of produce delivered (by value) was delivered by shareholders and 0.8% of produce delivered (by value) was delivered by non-shareholders and that 94.7% of shareholders (by value) delivered produce.

The taxpayer has estimated that for the year ended 30 June 2011 99.6% of produce delivered (by value) will be delivered by shareholders and 0.4% of produce delivered (by value) will be delivered by non-shareholders and that 94.9% of shareholders (by value) will deliver produce.

The information provided by the taxpayer confirms that for the year ended 30 June 2009 it acquired more than 90% of the total value of produce acquired from its shareholders. Further, the estimates provided by the taxpayer for the years ended 30 June 2010 and 30 June 2011 show that more than 90% of the total value of produce acquired was/will be acquired from its shareholders in those years.

Accordingly, provided that the taxpayer continues to comply with the 90% requirement in section 118 of the ITAA 1936, section 118 of the ITAA 1936 will not apply to deem that the taxpayer is not a co-operative company for the purpose of Division 9 of Part III of the ITAA 1936.

Question 3

Summary

Provided that the taxpayer continues to satisfy the 90% requirement in paragraph 120(1)(c) of the ITAA 1936, the taxpayer will be entitled to a deduction under paragraph 120(1)(c) of the ITAA 1936 for so much of its assessable income that is applied for or towards the repayment of loans obtained from Commonwealth or State governments that enable the taxpayer to acquire assets which are required for the purpose of carrying on its business.

Detailed reasoning

A company that satisfies the definition of a co-operative company under section 117 of the ITAA 1936 and meets the requirements set out in section 118 of the ITAA 1936 is entitled to the deductions listed in section 120 of the ITAA 1936.

Paragraph 120(1)(c) of the ITAA 1936 provides for a deduction for so much of the assessable income of a co-operative company, that has as its primary object the acquisition of commodities or animals from its shareholders for disposal or distribution, that is applied for or towards the repayment of loans obtained from Commonwealth or State governments that enable the company to acquire assets which are required for the purpose of carrying on the business of the company.

However, the deduction under paragraph 120(1)(c) of the ITAA 1936 is not allowed unless shares representing at least 90% of the value of the company are held by persons who supply the company with commodities or animals which the company requires for the purpose of its business.

Application to the taxpayer's circumstances

As the taxpayer satisfies the definition of a co-operative company provided in section 117 of the ITAA 1936 and meets the requirements of section 118 of the ITAA 1936, the taxpayer is a co-operative company for the purpose of Division 9 of Part III of the ITAA 1936.

The information provided by the taxpayer confirms that for the year ended 30 June 2009 93.6% of shareholders (by value) delivered produce. The taxpayer has estimated that for the year ended 30 June 2010 94.7% of shareholders (by value) delivered produce and for the year ended 30 June 2011 94.9% of shareholders (by value) will deliver commodities.

Accordingly, provided that the taxpayer continues to satisfy the 90% requirement in paragraph 120(1)(c) of the ITAA 1936, the taxpayer will be entitled to a deduction under paragraph 120(1)(c) of the ITAA 1936 for so much of its assessable income that is applied for or towards the repayment of loans obtained from Commonwealth or State governments that enable the taxpayer to acquire assets which are required for the purpose of carrying on its business.