1 Is the taxpayer a co-operative company as defined in section 117 of the Income Tax Assessment Act 1936 (ITAA 1936)?
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 allowed 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 a State Government loan, including for principal repayments and for interest costs, in the income year that each respective payment is paid? Answer Yes. This ruling applies for the following periods : Year ended 30 June 20XX to Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
The taxpayer is as a co-operative company. The taxpayer manages its affairs so that at least 90% of products by value are acquired from and sold to shareholders. The primary business activities of the taxpayer include sales, warehousing and distribution of merchandise and equipment. The taxpayer also value adds to some of the commodities acquired by further processing them. The taxpayer's constitution limits the number of shares that may be held by any one shareholder. The taxpayer's constitution prohibits the quotation of the taxpayer's shares on any stock exchange. The taxpayer's constitution only allows membership when there is reasonable belief the person will be an active member. The taxpayer is considering borrowing money from a State Government.
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)
Question 1 Is the taxpayer a co-operative company as defined in section 117 of the Income Tax Assessment Act 1936 (ITAA 1936)? Summary The taxpayer is a co-operative company as defined in section 117 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. Subsection 117(1) of the ITAA 1936 provides; In this Division, ' co-operative company ' means a company, not being a friendly society dispensary, the rules of which limit the number of shares which may be held by, or by and on behalf of, any one shareholder, and prohibit the quotation of the shares for sale or purchase at any stock exchange or in any public manner whatever, and includes a company, not being a friendly society dispensary, which has no share capital, and which in either case 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. A co-operative company therefore has to satisfy each of the following conditions: the company is not a friendly society dispensary; the rules of the company limit the number of shares that may be held by any one shareholder; 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; be established for the purpose of carrying on any business having as its primary object or objects one or more of the objects listed at paragraphs (a) to (e). The taxpayer is not a 'friendly society dispensary' as is defined in section 995-1 of the Income Tax Assessment Act 1997 ('ITAA 1997').
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. In considering the primary object or objects of a business, Taxation Ruling TR 1999/14 Income tax: determining the co-operative status of a company which makes loans to its shareholders (TR 1999/14), at paragraph 7, provides two questions that need 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) of the ITAA 1936, the company does not qualify as a 'co-operative company'.
Each business carried on by a company may have several primary objects. This is implicit in the words of section 117 of the ITAA 1936, and is acknowledged by remarks made in Brookton Co-operative Society Ltd v. FC of T (1981) 147 CLR 441; 81 ATC 4346; (1981) 11 ATR 880 by Aickin J (at CLR 463-4; ATC 4360; ATR 895): "Section 117 contemplates that there may be several primary objects of the business carried on by the company and moreover that there may be one or more secondary or subsidiary objects." In this case, as outlined in the taxpayer's Constitution and the facts and circumstances to which this ruling is based upon, the taxpayer's primary objects are: Sales, warehousing and distribution of merchandise and equipment (satisfying paragraph 117(1)(a) of the ITAA 1936 as the activity involves the acquisition of commodities for disposal or distribution among its shareholders); and The processing of commodities (satisfying paragraphs 117(1)(b) and (c) of the ITAA 1936 as the activity involves the acquisition of commodities from shareholders for disposal or distribution and this activity processes commodities of its shareholders).
These primary objects are within the scope of the objects listed in paragraphs (a) to (e) of subsection 117(1) of the ITAA 1936. The taxpayer does not have any other primary object or objects that are not set out in subsection 117(1) of the ITAA 1936. The taxpayer is not a credit union as defined under section 23G of the ITAA 1936. Therefore, it is not excluded from being a co-operative company under subsection 117(2) of the ITAA 1936. Accordingly, the taxpayer meets the definition of a co-operative company under section 117 of the ITAA 1936. Question 2 Does section 118 of the ITAA 1936 apply so that the taxpayer is deemed not to be a co-operative company? 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. It states that:
If, in the ordinary course of business of a company in the year of income, the value of commodities and animals disposed of to, or acquired from, its shareholders by the company, or the amount of its receipts from the storage, marketing, packing and processing of commodities of its shareholders, or from the rendering of services to them, or the amount lent by it to them, is less respectively than 90% of the total value of commodities and animals disposed of or acquired by the company, or of its receipts from the storage, marketing packing and processing of commodities, or from the rendering of services, or of the total amount lent by it, that company shall in respect of that year be deemed not to be a co-operative company. 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 dealt with in relation to one or more of the objects set out in subsection 117(1) of the ITAA 1936 with its shareholders is less than 90% of the total value of its business under the respective objects.
In the present case, the taxpayer confirmed that for the current year, more than 90% of commodities acquired by value were acquired from shareholders. The taxpayer also confirmed that for the current year, more than 90% of sales, warehousing and distribution of merchandise and equipment made by the taxpayer were made among shareholders of the taxpayer. This ruling is made on the basis that the taxpayer will meet the requirements of section 118 of the ITAA 1936 for each income tax year covered by this ruling. 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 Is the taxpayer allowed 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 a State Government loan, including for principal repayments and for interest costs, in the income year that each respective payment is paid? Summary
Provided that the taxpayer continues to satisfy the 90% requirement in paragraph 120(1)(c) of the ITAA 1936, the taxpayer is allowed 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 State Government 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 allowed the deductions listed in section 120 of the ITAA 1936 if they satisfy the requirements. Paragraph 120(1)(c) of the ITAA 1936 provides that: 120(1) So much of the assessable income of a co-operative company as: ...
(c) in the case of a company having as its primary object that specified in paragraph 117(1)(b) - is applied by the company for or towards the repayment of any moneys loaned to the company by a government of the Commonwealth or a State to enable the company to acquire assets which are required for the purpose of carrying on the business of the company or to pay that government for assets so required which the company has taken over from that government; shall be an allowable deduction: Provided that the deduction under paragraph (c) shall not be allowed unless shares representing not less than 90% of the value of the company are held by persons who supply the company with the commodities or animals which the company requires for the purposes of its business.
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 any monies loaned to the company from the Commonwealth or State government 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. In this case, 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.
As established in Question 1 of this Ruling, the taxpayer has a primary object that is the acquisition of commodities from shareholders for disposal or distribution. The reference to government rather than Commonwealth refers specifically to the executive arm of the government rather than merely an agent of the Commonwealth as was found in Inglis v Commonwealth Trading Bank of Australia (1969) 119 CLR 334. In this case, it is clear that the loan to be obtained by the taxpayer from the State Government satisfies this requirement. The expected loan from the State Government will be used to facilitate the construction of an asset for the taxpayer which will be used in operations relating to the primary activity of processing and sale of commodities. The monies will be used to pay the capital expenditure costs. Therefore, the loan's purpose is consistent with enabling the taxpayer to acquire assets used in carrying on its business.
The taxpayer has confirmed that for the current year, over 90% of the value of the acquisition of commodities was from its shareholders. Further, the taxpayer confirms that under their policies and procedures, the acquisition of all commodities are sourced from shareholders which ensures the statutory minimum proportion of business conducted with shareholders exceeds the required 90% of total business. It is assumed that the taxpayer will conduct business with shareholders holding over 90% of the paid up capital of the taxpayer during each income tax year covered by this ruling.
Accordingly, provided that the taxpayer continues to satisfy the 90% requirement in paragraph 120(1)(c) of the ITAA 1936, the taxpayer will be allowed 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 the loan obtained from the State government that enable the taxpayer to acquire assets and build additional processing and warehousing facilities which are required for the purpose of carrying on its business. These deductions can only be claimed in the year that the repayment of the principal or the payment of interest is made.