Edited version of private advice

Authorisation Number: 1052351141312

Date of advice: 16 January 2025

Ruling

Subject: Capital gains tax

Question 1

Is Company A Pty Ltd (A), a proprietary company limited by shares under the Corporations Act 2001 (Corporations Act), the same 'entity' for all purposes under the Income Tax Assessment Act 1997 (ITAA 1997) after its registration as a co-operative under the Co-operatives National Law Application Act 2013 (Vic) (Co-op Act)?

Answer 1

Yes.

Question 2

Will CGT event A1 under section 104-10 of the ITAA 1997 happen for A in respect of its CGT assets as a result of its registration as a co-operative under the Co-op Act?

Answer 2

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Current Structure

A is a proprietary company limited by shares, subject to the statutory obligations of the Corporations Act.

Since its incorporation on XX March 20XX, A has not changed its structure as a proprietary company limited by shares.

In 20XX, A changed its name from Company B Ltd Pty (being its name at the time of incorporation) to its current name.

In 20XX, the constitution of A was updated and has remained unchanged since that time.

The ordinary shares in A are currently held by xx shareholders, each holding xx shares.

A has X directors.

The primary activities of A are:

•                     collective bargaining for the supply of products on behalf of its members who are made up of local independent retail businesses; and

•                     the provision of an annual trade show for its members.

There are currently xx members of the business, with xx shops.

Proposed change

A wishes to convert its structure to a co-operative incorporated under the Co-op Act (Proposed change).

To enable registration as a co-operative, the following documents have been drafted by A's lawyers:

•                     application to approve name rules and formation disclosure statement;

•                     model rules for distributing co-operatives; and

•                     disclosure statement for formation of a distributing co-operative.

It is intended that the registration of A as a co-operative take place within the next X income years.

Assumption

A will satisfy all the requirements under Division 5 of Part 2.1 of the Co-operatives National Law (Vic) to be registered as a co-operative and will be issued with a certificate of registration.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 960-100

Income Tax Assessment Act 1997 section 995-1

Corporations Act 2001 Part 5A.2 of Chapter 5A

Corporations Act 2001 section 601AI

Corporations Act 2001 section 601AJ

Corporations Act 2001 section 601AK

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

Co-operatives (Adoption of National Law) Act 2012 (NSW)

Co-operatives National Law (Vic) section 4

Co-operatives National Law (Vic) section 17

Co-operatives National Law (Vic) section 18

Co-operatives National Law (Vic) section 19

Co-operatives National Law (Vic) Division 5 of Part 2.1

Co-operatives National Law (Vic) section 29

Co-operatives National Law (Vic) section 30

Co-operatives National Law (Vic) section 31

Co-operatives National Law (Vic) section 32

Co-operatives National Law (Vic) section 33

Co-operatives National Law (Vic) section 34

Co-operatives National Law (Vic) subsection 34(1)

Co-operatives National Law (Vic) subsection 34(2)

Co-operatives National Law (Vic) subsection 34(3)

Co-operatives National Law (Vic) section 38

Co-operatives National Law (Vic) Division 2 of Part 4.3

Co-operatives National Law (Vic) section 402

Co-operatives National Law (Vic) section 405

Co-operatives National Law (Vic) section 409

Co-operatives National Law (Vic) subsection 409(1)

Co-operatives National Law (Vic) Division 3 of Part 4.3

Co-operatives National Law (Vic) section 413

Co-operatives National Law (Vic) subsection 413(2)

Co-operatives National Law (Vic) paragraph 413(2)(a)

Reasons for decision

All subsequent legislative references are to the ITAA 1997, unless otherwise specified.

Question 1

Summary

The proposed registration of A as a co-operative under the Co-op Act does not change the identity of the company nor does it create a new legal entity. Instead, under the Co-op Act, A is taken to be the same entity after registration as a co-operative as it was before. A will be the same entity for all purposes under the ITAA 1997 after its registration as a co-operative.

Detailed reasoning

Co-operatives National Law

Section 4 of the Co-op Act adopts the Co-operatives National Law (CNL), as set out in the Appendix to the Co-operatives (Adoption of National Law) Act 2012 (NSW), as a law of Victoria. In so applying, the CNL may be referred to as the Co-operatives National Law (Vic).

Reference in this ruling to the CNL is a reference to both the Co-operatives National Law (Vic) and to the CNL set out in the Co-operatives (Adoption of National Law) Act 2012 (NSW) which it mirrors.

Registration of an existing company as a co-operative

Section 4 of the CNL 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;

but does not include:

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

(b)           a corporation sole.

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

A is therefore a corporation pursuant to paragraph (a) of the definition of corporation under section 4 of the CNL.

Under section 17 of the CNL, a body may be registered under the CNL as a distributing (as defined in section 18 of the CNL) or non-distributing co-operative (as defined in section 19 of the CNL).

Division 5 of Part 2.1 of the CNL deals with the registration of an existing corporation as a co-operative.

Under section 29 of the CNL, an existing corporation (which includes a company), may apply to be registered as a co-operative. Sections 30, 31 and 32 set out the requirements for the application to register a corporation as a co-operative. Under section 33, on the registration of the corporation as a co-operative, a certificate of registration is issued.

Continuation of same entity under the CNL

Section 34 of the CNL sets out the consequences of a corporation that registers as a co-operative, as follows:

(1)           The corporation is to be taken to be incorporated under this Law on its registration.

(2)           Except as expressly provided in this Law, the registration and incorporation of the corporation as a co-operative does not prejudice any right of a member in relation to any shares held at the time of registration and incorporation.

(3)           The change of registration and incorporation does not affect the identity of the corporation and it is taken to be the same body after registration as a co-operative as it was before and no act, matter or thing is affected by the change.

(Emphasis added)

Section 34 of the CNL indicates that under the current co-operative legislative scheme, a company that changes its registration to a co-operative continues to be the same entity after its registration as a co-operative as it was before.

Division 2 of Part 4.3 of the CNL covers the situation where a co-operative converts to a company under the Corporations Act (i.e. the opposite to the Proposed change), which pursuant to section 402 of the CNL is known as a 'transfer of incorporation'. Sections 405, 409 and 413 of the CNL address some of the consequences of this 'transfer'. Notably, subsection 409(1) of the CNL states that 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'. Further under subsection 413(2)[1] of the CNL, the following effects of the transfer apply from the day on which the transfer takes effect:

(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.

Therefore, under the current CNL, an entity is considered to be the same entity (or a continuation of the same entity) regardless of whether the entity is a company changing its registration to a co-operative (as is the case here) or vice-versa.

Is a company the same entity for tax purposes after it registers as a co-operative?

Section 995-1 defines an 'entity' to have the meaning in section 960-100. An 'entity' is defined under section 960-100 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;

(h)           an approved deposit fund.

Section 995-1 defines a 'company' to mean:

(a)           a body corporate; or

(b)           any other incorporated association or body of persons; but does not include a partnership or a non-entity joint venture.

Relevant to both definitions is the meaning of 'body corporate' which is not defined in the income tax law and therefore takes its meaning at general law. The Macquarie Dictionary defines a body corporate as 'a person, association or group of persons legally incorporated in a corporation'.

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 (MT 2006/1).

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.

A is a body corporate under the general law meaning of the term and is therefore also a 'company' and 'entity' under the ITAA 1997.

Section 38 of the CNL 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.

A co-operative registered under the CNL is also considered a 'corporation' under section 4 of the CNL and taken to be incorporated under the CNL if it is an existing company pursuant to subsection 34(1) of the CNL. Accordingly, a co-operative under the CNL is a 'body corporate' within the general law meaning of the term, as well as a 'company' and 'entity' under the ITAA 1997.

Therefore, after A's registration as a co-operative under the CNL, it will continue to be a 'body corporate', 'company' and 'entity' under the ITAA 1997. However, as discussed in ATO ID 2002/808 Income tax: Capital gains tax: conversion from unincorporated association to incorporated association under Associations Incorporation Act 1981(Qld) (ATO ID 2002/808), the fact that one entity is a 'body corporate', 'company' and 'entity' for income tax purposes before an event (in that case an incorporation) and remains a 'body corporate', 'company' and 'entity' after an event does not make them the same 'entity' for the purposes of the ITAA 1997. Regard must be had to the legislation under which the change is effected to see if it provides for the continuation of the same legal entity.

Continuation of same entity under the CNL

As mentioned above, provisions in the CNL, namely section 34 and subsection 413(2) of the CNL, provide for the continuation of an existing company as the same entity following its registration as a co-operative. This distinguishes the Proposed change from the facts in ATO ID 2002/808.

The Commissioner therefore considers that A will be the same entity for the purposes of the ITAA 1997 following its registration as a co-operative.

Continuation of same entity under the Corporations Act

The position is further supported by provisions in the Corporations Act governing the transfer of registration of companies in Part 5A.2 of Chapter 5A. Under section 601AI of the Corporations Act, a company may transfer its registration to registration under a law of the Commonwealth or of a State or Territory by passing a special resolution resolving to transfer its registration and complying with sections 601AJ and 601AK of the Corporations Act.

Section 601AK of the Corporations Act states:

ASIC may make a transfer of registration declaration in relation to the company under this section if ASIC is satisfied that:

(1)           the application complies with section 601AJ; and

(2)           the company's creditors are not likely to be materially prejudiced by the transfer of the company's registration; and

(3)           the law of the Commonwealth or of the State or Territory concerned adequately provides for:

(i)            the continuation of the company's legal personality after the transfer; and

(ii)           the preservation of any rights or claims against the company (other than the right of a member as a member) that accrued while the company was registered under this Act.

(Emphasis added)

ATO ID 2004/798

For completeness, the Commissioner notes that ATO Interpretative Decision 2004/798 Income tax: change from a co-operative to a company (ATO ID 2004/798) considers whether, under the previous co-operatives legislative scheme, a co-operative continues to be the same entity for the purposes of the ITAA 1997 after its conversion from a co-operative to a company. This is the reverse situation to the Proposed change. The ruling discusses that a co-operative incorporated under the Co-operatives Act 1992 (NSW) is a body corporate under that legislation as well as at general law. The ruling also highlights the existence of provisions in the Corporations Act and Co-operatives Act 1992 (NSW) that provide for the continuation of the taxpayer as the 'same entity'.

The Commissioner considers that the approach adopted in ATO ID 2004/798 in examining the meaning of 'body corporate', 'company' and 'entity' under the ITAA 1997 and provisions in the co-operative legislation on changes in the registration of an entity, is a sound approach and should be followed to yield a similar outcome, albeit for the reverse situation.

Question 2

Summary

Since A will remain the same entity for the purposes of the ITAA 1997 after it changes its registration to a co-operative, there is no change in the ownership of CGT assets upon the change in registration and CGT event A1 therefore does not happen under section 104-10.

Detailed reasoning

Subsection 104-10(1) states that CGT event A1 happens when there is a disposal of a CGT asset. Pursuant to subsection 104-10(2), you dispose of a CGT asset if a change of ownership occurs from you to another entity.

As concluded in Question 1, A will remain the same 'entity' for the purposes of the ITAA 1997 after its registration as a co-operative under the CNL. As a consequence, there is no disposal, transfer or change in the ownership of any assets for A.

This position is further supported by paragraph 413(2)(a) of the CNL which states that the assets of the original body vest in the new body without the need for a conveyance, transfer, assignment or assurance.

Therefore, CGT event A1 will not arise and no capital gain or capital loss will arise from the Proposed change.

[1] Division 3 of Part 4.3 of the CNL (which includes section 413 of the CNL) applies to a transfer of incorporation under Division 2 of Part 4.3 of the CNL- see the Note under subsection 409(1) of the CNL.