Edited version of private advice

Authorisation Number: 1051662737189

Date of advice: 21 April 2020

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

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

This ruling applies for the following periods:

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

Year ended 30 June 2025

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The taxpayer is a co-operative company.

The taxpayer manages its affairs so that at least 90% of its produce is acquired from shareholders.

The taxpayer's rules limit the shareholding.

The taxpayer's rules prohibit the quotation of the taxpayer's shares on any stock exchange.

The taxpayer's rules states that the directors may refuse to transfer any shares if the transferee is not qualified to be a member or of whom they do not approve as determined by the directors.

The taxpayer is considering borrowing money from a State government.

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

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, at paragraph 7 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'.

The taxpayer is not a 'friendly society' as having meaning given by section 995-1 of the Income Tax Assessment Act 1997. The taxpayer's rules limit 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 primary activity is to carry on the business of storage, handling and transport of the produce 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 produce for 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 Case H25, 76 ATC 185, Chairman, JL Burke, at paragraph 2, 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 that, inter alia, it is allowed in terms of sec. 120(1) a deduction of so much of its assessable income as (a) is distributed among its shareholders as rebates or bonuses based on business done by shareholders with the company or (b) is distributed among its shareholders as interest or dividends on shares....

In the same case, member C.F. Fairleigh QC added at paragraph 11 of his judgment 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.

The information provided by the taxpayer confirms that the co-operative's bulk handling of the produce delivered by members of the co-operative to the co-operative are the co-operative's primary activities. Under the taxpayer's rules the delivery of produce to the co-operative is a mandatory requirement for members to maintain membership, so that the statutory minimum proportion of business conducted with members exceeds the required 90% of total business.

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 the 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.

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 delivery of produce to the co-operative is a mandatory requirement for members to maintain membership, so that the statutory minimum proportion of business conducted with members exceeds the required 90% of total business.

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 the Commonwealth or State government that enable the taxpayer to acquire assets which are required for the purpose of carrying on its business.