Edited version of your written advice

Authorisation Number: 1012749650797

Ruling

Subject: Transfer of registration from co-operative to a company

Question 1

Is the Co-operative the same 'entity' under section 960-100 of the Income Tax Assessment Act 1997 ('ITAA 1997') after the conversion from an incorporated co-operative to a company?

Answer

Yes.

Question 2

Will a franking debit pursuant to item 4 of the table in subsection 205-30(1) of the Income Tax Assessment Act 1997 arise as a result of the transfer of the Co-operative's registration?

Answer

No.

Question 3

Pursuant to section 104-10 of the Income Tax Assessment Act 1997, will Capital Gains Tax (CGT) event A1 occur in respect of the Co-operative's CGT assets as a result of the transfer of its registration?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The Co-operative is a co-operative incorporated under the Co-operatives Act 1996 (Vic). The Co-operative is now regulated under the Co-operatives National Law (Victoria) ('Co-op National Law'), as adopted under section 4 of the Co-operatives National Law Application Act 2013 (Vic).

Section 4 of the Co-op National Law defines a corporation as follows:

"corporation" includes:

(a) a company; and

(b) any body corporate (whether incorporated in this jurisdiction or elsewhere); and

(c) an unincorporated body that, under the law of its place of origin, may:

(i) sue or be sued; or

(ii) hold property in the name of its secretary or of an office holder of the body duly appointed for that purpose;

(a) but does not include:

(d) an exempt public authority (within the meaning of the Corporations Act); or

(e) a corporation sole.

Note : A co-operative is a corporation within this definition.

The Co-operative intends to transfer its incorporation under the Co-op National Law to a company registered under the Corporations Act 2001 (Cth) ('Corporations Act').

The relevant provisions of the Co-op National Law which enable a transfer of incorporation are:

403 Application for transfer

A co-operative may, subject to obtaining any necessary approvals under this Division, apply to become registered, incorporated or otherwise established as one of the following:

(a) a company under the Corporations Act…

409 New body is a continuation of the co-operative

(1) When a co-operative transfers to a new body, the corporation constituted by the new body is taken to be the same entity as the corporation constituted by the co-operative.

413 Effect of merger or transfer on assets and liabilities

(2) On and from the relevant day for an event to which this Division applies:

(a) the assets of the original body vest in the new body without the need for a conveyance, transfer, assignment or assurance; and

(b) the rights and liabilities of the original body become the rights and liabilities of the new body; and

(c) all proceedings by or against the original body pending immediately before the relevant day are taken to be proceedings pending by or against the new body; and

(d) an act, matter or thing done or omitted to be done by, to or in relation to the original body before the relevant day is (to the extent to which the act, matter or thing has any force or effect) taken to have been done or omitted by, to or in relation to the new body; and

(e) a reference in an instrument or in a document of any kind to the original body is to be read as, or as including, a reference to the new body.

Subsection 601BM(1) of the Corporations Act states:

Registration under this part does not:

(a) create a new legal entity; or

(b) affect the body's existing property, rights or obligations (except as against the members of the body in their capacity as members); or

(c) render defective any legal proceedings by or against the body or its members

Relevant legislative provisions

Co-operatives Act 1996 (Vic) section 36

Co-operatives National Law Application Act 2013 (Vic) section 4

Co-operatives National Law (Victoria) section 4

Co-operatives National Law (Victoria) section 38

Co-operatives National Law (Victoria) section 409

Co-operatives National Law (Victoria) section 413

Corporations Act 2001 subsection 601BM(1)

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 202-15

Income Tax Assessment Act 1997 section 205-30

Income Tax Assessment Act 1997 section 960-100

Income Tax Assessment Act 1997 section 960-115

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

The Co-operative is considered to be a 'body corporate' at general law. It is also considered to be an 'entity' as it is a 'body corporate' under paragraph 960-100(1)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997') and a 'company' as defined in section 995-1 of the ITAA 1997.

Regardless of the transfer of its registration from a co-operative to a company, the identity of the Co-operative is preserved and continues with the same assets, rights and liabilities, albeit as a company by registration.

Accordingly, the Co-operative is the same 'entity' for the purposes of sections 960-100 and 995-1 the ITAA 1997 prior to and after it completes its transfer of incorporation.

Detailed reasoning

ATO Interpretative Decision 2004/798 Income Tax: change from a co-operative to a company considers whether, under the previous co-operatives legislative scheme, a co-operative continues to be the same entity after it transfers its registration to a company. Under the previous co-operatives legislative scheme, a co-operative was considered to be a 'body corporate' (see section 36 of the Co-operatives Act 1996 (Vic)).

A 'company' is defined in section 995-1 of the ITAA 1997 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.

Section 995-1 of the ITAA 1997 defines an 'entity' to have the meaning in section 960-100 of the ITAA 1997. An 'entity' is defined to mean any of the following:

(a) an individual;

(b) a body corporate;

(c) a body politic;

(d) a partnership;

(e) any other incorporated association or body of persons;

(f) a trust;

(g) a superannuation fund.

ATO ID 2004/798 concludes that the taxpayer remains the same 'entity' for the purposes of section 960-100 of the ITAA 1997, after the conversion as the term 'body corporate' is used to define both a 'company' in section 995-1 of the ITAA 1997 and an 'entity' in section 960-100 of the ITAA 1997. ATO ID 2004/798 states:

However, for the purposes of the ITAA 1997, the taxpayer as incorporated under the Co-op Act is an 'entity' as defined in paragraph 960-100(1)(b) of the ITAA 1997. It is also a 'company' as defined in section 995-1 of the ITAA 1997.

After the taxpayer's registration under the Corporations Act, it will continue to be a 'body corporate', 'company' and 'entity' as relevantly defined in the ITAA 1997. Notwithstanding the taxpayer's transfer of incorporation to a separate Act, the taxpayer preserves its identity and continues to be the same legal entity.

However, the current Co-operatives National Law (Victoria) ('Co-op National Law'), as adopted under section 4 of the Co-operatives National Law Application Act 2013 (Vic), does not use the term 'body corporate' in relation to a co-operative. Instead, a co-operative incorporated under the Co-op National Law is considered to be a 'corporation' under the definition in section 4 of the Co-op National Law (specifically, see the note):

"corporation" includes:

(f) a company; and

(g) any body corporate (whether incorporated in this jurisdiction or elsewhere); and

(h) an unincorporated body that, under the law of its place of origin, may:

(i) sue or be sued; or

(ii) hold property in the name of its secretary or of an office holder of the body duly appointed for that purpose;

(b) but does not include:

(i) an exempt public authority (within the meaning of the Corporations Act); or

(j) a corporation sole.

Note : A co-operative is a corporation within this definition.

In order for the reasoning in ATO ID 2004/798 to be relevant in this instance, it must be established that the Co-operative incorporated under the Co-op National Law is a 'body corporate'.

As the term 'body corporate' is not defined in Australia's income tax legislation, the ordinary meaning of the term applies. The Butterworths Concise Australian Legal Dictionary (second edition) defines a 'body corporate' as 'an artificial legal entity having separate legal personality'.

The Commissioner has considered the meaning of the term 'body corporate' in Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number (ABN).

Paragraph 30 of MT 2006/1 states that the term 'body corporate' has the following meaning:

'Body Corporate' is not a defined term. The term takes its meaning from the general law. 'Body corporate' is a general term to describe an artificial entity having separate legal existence. A body corporate has the ability to continue in existence indefinitely and to keep its identity regardless of changes to its membership. It also has the power to act, hold property, enter into legal contract, sue and be sued in its own name, just as a natural person can.'

Section 38 of the Co-op National Law prescribes that a co-operative:

(a) has perpetual succession; and

(b) may have a common seal; and

(c) may sue and be sued in its corporate name; and

(d) subject to this Law, is capable of taking, purchasing, leasing, holding, selling and disposing of real and personal property; and

(e) may do and suffer all acts and things that corporations may by law do and suffer and that are necessary or expedient.

Accordingly, the Co-operative incorporated under the Co-op National Law, is a 'body corporate' within the general law meaning of the term as defined in MT 2006/1.

As the Co-operative is a 'body corporate', it therefore falls under the definition of an 'entity' under paragraph 960-100(1)(b) of the ITAA 1997. The Co-operative is also a 'company' pursuant to section 995-1 of the ITAA 199, which includes a 'body corporate' in the definition.

The provisions in the Co-op National Law and the Corporations Act 2001 ('Corporations Act') both provide for the continuation of the Co-operative as the same entity following its registration as a company. The act of registration under a different Act will not create a 'new legal entity'.

Subsection 409(1) of the Co-op National Law states:

When a co-operative transfers to a new body, the corporation constituted by the new body is taken to be the same entity as the corporation constituted by the co-operative.

Subsection 601BM(1) of the Corporations Act states:

Registration under this part does not:

(a) create a new legal entity; or

(b) affect the body's existing property, rights or obligations (except as against the members of the body in their capacity as members); or

(c) render defective any legal proceedings by or against the body or its members.

Accordingly, after the Co-operative registers under the Corporations Act, notwithstanding its transfer of incorporation to a separate Act, the Co-operative will preserve its identity and continue to be the same legal entity.

In addition, the assets, rights and liabilities of the Co-operative vest in and are preserved when it is registered under the Corporations Act without the need for any 'conveyance, transfer or assignment or assurance' (subsection 413(2) of the Co-op National Law). This indicates that the identity of the Co-operative is preserved and continues with the same assets, rights and liabilities, albeit as a company by registration.

Therefore, the Co-operative is the same 'entity' for the purposes of sections 960-100 and 995-1 of the ITAA 1997 as it is a 'body corporate' under the general law prior to and after it completes its transfer of incorporation.

Question 2

Summary

The Co-operative remains a franking entity upon the transfer of its registration. Accordingly, item 4 of the table in subsection 205-30(1) of the ITAA 1997 will not apply a franking debit to the Co-operative's franking account.

Consequently, the existing franking credits of the Co-operative will be available for its use after it transfers its registration to a company.

Detailed reasoning

Item 4 of the table in subsection 205-30(1) of the ITAA 1997 provides that a debit arises in the franking account of an entity if the entity ceases to be a 'franking entity' and the entity's franking account is in surplus immediately before ceasing to be a franking entity. The amount of the debit is the amount of the franking surplus, and the debit arises on the day when the entity ceases to be a franking entity.

The definition of 'franking entity' in section 202-15 of the ITAA 1997 includes a 'corporate tax entity', as defined in section 960-115 of the ITAA 1997.

A 'corporate tax entity' is relevantly defined in subsection 960-115(a) of the ITAA 1997 to include a 'company'.

As concluded in Question 1, the Co-operative is a 'body corporate' within the general law meaning of the term as defined in MT 2006/1. It is, therefore, considered to be a 'company' pursuant to the definition in section 995-1 of the ITAA 1997. The Co-operative remains a 'company' despite the transfer of its registration.

As a result, the Co-operative remains a franking entity upon the transfer of its registration and so item 4 of the table in subsection 205-30(1) of the Income Tax Assessment Act 1997 will not apply a franking debit to the Co-operative's franking account.

Consequently, the existing franking credits of the Co-operative will be available for its use after it transfers its registration to a company.

Question 3

Summary

The Co-operative remains the same 'entity' for the purposes of the ITAA 1997 prior to and after it completes its transfer of incorporation.

As a consequence, for CGT purposes, there is no transfer of assets or change in ownership of the assets of the Co-operative as a result of the transfer of its registration to a company under the Corporations Act.

As there is no disposal of the assets of the Co-operative following the transfer of its registration, CGT event A1 will not happen to its CGT assets and no capital gain or loss will arise from the transfer of its registration.

Detailed reasoning

A taxpayer is assessable on any net capital gain that arises in an income year, pursuant to section 102-5 of the ITAA 1997. A capital gain arises where a CGT event happens in relation to their CGT assets with effect from 12 December 2006.

Broadly, a 'CGT asset' is defined in section 995-1 of the ITAA 1997 with reference to section 108-5 of the ITAA 1997, as any kind of property or a legal or equitable right that is not property, that is acquired after 19 September 1985.

CGT events contain rules for determining whether a taxpayer has made a capital gain or capital loss in respect of a transaction relating to their CGT assets, and how that gain or loss is calculated.

The concept of a CGT event is fundamental to the CGT provisions in that, if no CGT event happens in relation to a taxpayer, a capital gain or loss cannot arise in the hands of the taxpayer.

Section 104-10 of the ITAA 1997 states that CGT event A1 arises when there is a change in ownership of a taxpayer's CGT assets.

ATO ID 2002/808 Capital gains tax: conversion from unincorporated association to incorporated association under Associations Incorporation Act 1981 (Qld) considers the CGT implications when an unincorporated association incorporates under the Associations Incorporation Act 1981 (Qld).

ATOID 2002/808 states:

subsection 960-100(1) of the ITAA 1997 includes unincorporated associations and body corporates separately within the definition of 'entity'. They are also separately included within the definition of 'company' in section 995-1 of the ITAA 1997.

As a result, ATO ID 2002/808 concludes that the newly incorporated association is not the same 'entity' as the unincorporated association. Therefore, CGT event A1 happens as there is a change in the ownership (i.e. a disposal) of the assets from the unincorporated association to the incorporated association.

However, in contrast, as concluded in Question 1, the Co-operative remains the same 'entity' for the purposes of the ITAA 1997 as it is a 'body corporate' within the meaning of the term prior to and subsequent to its transfer of registration under the Corporations Act.

As a consequence, for CGT purposes, there is no transfer of assets between the state registered Co-operative and the registered company Co-operative.

Accordingly, there is no change of ownership (i.e. a disposal) in respect of the assets of the Co-operative as a result of the transfer of its registration to a company under the Corporations Act.

As there is no disposal of the assets of the Co-operative following the transfer of its registration, CGT event A1 will not happen to its CGT assets and no capital gain or loss will arise from the transfer of its registration.