Edited version of your private ruling

Authorisation Number: 1012068466559

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Ruling

Subject: Income Tax: Deduction- Co-operative companies

Question 1

Does a co-operative society (co-op) fall under the definition of paragraph 117(1)(b) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will the principal payments of the loan obtained from a government agency for income producing capital purchases be tax deductible under paragraph 120(1)(c) of the ITAA 1936 in the financial year that is paid?

Answer

Yes, provided that members holding at least 90% of the paid up capital have done business with the co-op in that year in which they are made would not be an allowable deduction.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The co-op is a co-operative company registered under the Co-operatives Act 1992.

The co-op currently provides a diverse range of services to the farming community in the local area consisting of the acquisition of commodities or animals from its shareholders for disposal or distribution.

More than 90% of the shareholders are members of the co-op and are able to access the services that are provided by the co-op. More than 90% of all of the co-op's trade are with members.

The co-op intends to expand its services to members by purchasing capital items and infrastructure in order to supply and spread manure to members.

The co-op intends to apply for a loan available from a government agency to purchase income producing capital assets. The co-op assures that a minimum of 90% of its dealings are with its shareholders, who are able to access the services provided by the co-op.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 117(1).

Income Tax Assessment Act 1936 paragraph 117(1)(b).

Income Tax Assessment Act 1936 section 118.

Income Tax Assessment Act 1936 subsection 120(1).

Income Tax Assessment Act 1936 paragraph 120(1)(c).

Income Tax Assessment Act 1936 subsection 120(3).

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part IVA general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Subsection 117(1) of the ITAA 1936 provides that, for a co-operative company to fall within the meaning of Division 9 of the ITAA 1936, it must comply with the following conditions -

· its rules must limit the number of shares which may be held by or by and on behalf of any one shareholder;

· its rules must prohibit the quotation of its shares for sale or purchase at any stock exchange, or in any other public manner whatever;

· it must be established for the purpose of carrying on any business having as its primary object or objects one or more of the following -

· the acquisition of commodities or animals for disposal or distribution among its shareholders;

· the acquisition of commodities or animals from its shareholders for disposal or distribution;

· the storage, marketing, packing or processing of commodities of its shareholders;

· the rendering of services to its shareholders;

· 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.

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 the objects of the Co-op are acquisition of commodities or animals from its shareholders for disposal or distribution as outlined in its constitution.

Further, the Co-op's constitution limits the share capital as 'every member shall have at least ten shares but no member shall hold shares exceeding the nominal value nor shall any member hold more than one-fifth of the shares in the society'. Also, the constitution prohibits the quotation of its shares for sale or purchase at any stock exchange, or in any other public manner whatever.

Accordingly, the objects of the Co-op fall under the definition of paragraph 117(1)(b) of the ITAA 1936 and it is considered as a Co-operative for the purpose of Division 9 of the ITAA 1936.

Where a company is a co-operative within section 117 of the ITAA 1936 because of it primary objects, section 118 of the 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 facts of your case indicate that currently, more than 90% of the shareholders are members of the Co-op who are able to access the services that are provided by the co-op. You have reiterated the fact that 'the Co-op makes a point to ensuring that a minimum of 90% of its dealings are with member shareholders. Previous years have shown that the Co-op has an average 95% of the dealings with member shareholders '.

Accordingly, the Co-op satisfies the requirements under paragraph 117(1)(b) of the ITAA 1936 and section 118 of the ITAA 1936 for the purpose of Division 9 of the ITAA 1936.

Question 2

Where an organisation can satisfy the requirements of sections 117 and 118 of the ITAA 1936, and obtain the status of a co-operative company for income tax purposes, it becomes eligible for a range of deductions not usually available to other types of companies. These deductions relate to various forms of distributions to shareholders and in certain cases deductions for repayments of principal of government loans.

In the case of a co-operative company within the meaning of Division 9 of subsection 120(1) of the ITAA 1936 is allowed a deduction for so much of its assessable income as:

· is distributed among its shareholders as rebates or bonuses based on business done by shareholders with the company;

· is distributed among its shareholders as interest or dividends on shares; or

· in the case of a company having as its primary object the acquisition of commodities or animals from its shareholders for disposal or distribution - is applied by the company for the repayment of any moneys loaned to it by a government of the Commonwealth or a state to enable it to acquire assets required for carrying on its business, or to pay that government for assets as required which the company has taken over from that government.

Subsection 120(3) of the ITAA 1936 makes it clear that subsection 120(1)(c) of the ITAA 1936 applies to loans taken out for the purpose of acquiring assets from government or non-government sources. Subsection 120(3) of the ITAA 1936 was enacted by the Taxation Laws Amendment Act (No 3) 1996 (Act 78 of 1996) to make it clear that a deduction under paragraph 120(1)(c) of the ITAA 1936 is available whether or not the asset acquired comes from a government source.

The deduction under subsection 120(1)(c) of the ITAA 1936 is limited to a co-operative company with a primary object of acquiring commodities or animals from its shareholders for disposal or distribution. It is available in respect of the repayment of moneys loaned by a government (Commonwealth or State) to enable the company to acquire assets necessary to conduct its business or to pay for such assets acquired from the relevant government.

In order to qualify for a deduction under paragraph 120(1)(c) of the ITAA 1936, shares representing at least 90% of the company's paid up capital must be held by members who supply the company with the commodities or animals which the company requires for the purposes of its business.

This 90% shareholding requirement is especially important for co-operatives whose members are involved in rural industries. It may be that, because of seasonal conditions, a significant number of members do not do any business with the co-operative in a particular year. In order to sustain a claim for a deduction under paragraph 120(1)(c) of the ITAA 1936, it is necessary to ensure that members holding at least 90% of the paid up capital have in fact done business with the co-operative in that year.

There is some merit in the argument that the purpose test posited by paragraph 120(1)(c) of the ITAA 1936 incorporates business which is related to a principal object of the co-operative company within the meaning of section 117 of the ITAA 1936. Hence, assets acquired in furtherance of one of those objects would satisfy the requirements of paragraph 120(1)(c) of the ITAA 1936.

Therefore, deduction is allowable for the amount of repayment made during the financial year. Any repayments in excess of the total assessable income in the year in which they are made would not be an allowable deduction.

The Co-op satisfies the requirements of paragraph 117(1)(b) of the ITAA 1936 and section118 of the ITAA 1936 to be eligible for the concession under Division 9 of the ITAA 1936.

Therefore, the Co-op will be eligible to claim deductions for the principal payment of the loan that will be obtained from the government department for the purchase of assets for income producing purposes under paragraph 120 (1)(c) of the ITAA 1936, provided that members holding at least 90% of the paid up capital have in fact done business with the co-operative in that year. Any repayments in excess of the total assessable income of the year in which they are made would not be an allowable deduction.