Federal Commissioner of Taxation v Co-Operative Bulk Handling Ltd
Document type: Decision Impact Statement
Venue: Federal Court of Australia (WAD 158 of 2010)
Judgment date: 17 December 2010
Date published: 16 December 2014

Summary of decision:
Outlines the ATO response to the Full Federal Court decision that the taxpayer was exempt from income tax under s 50-40 of the ITAA 1997 as being established for the purpose of promoting the development of Australian agricultural resources, and not carried on for the profit or gain of its individual members.

Overview of facts:
Co-operative Bulk Handling Ltd (CBH) is the major bulk handler of grain in WA and was incorporated in 1933 with the principal object of establishing, maintaining and conducting any schemes for bulk handling of grain. A Royal Commission report in 1935 concluded that the handling of wheat in bulk by CBH had been of advantage to the wheat growing industry in WA. The Bulk Handling Act 1935 (WA) was enacted to regulate the business of CBH [later the Bulk Handling Act 1967 (WA)]. | In 1971, CBH had been accepted by the ATO as being exempt from tax under s 23(h) of the Income Tax Assessment Act 1936 , and by private ruling in 1996 the ATO confirmed that, if certain constitutional and legislative changes were made, CBH would be regarded as continuing not to be carried on for the profit or gain of its members. | In 2008, CBH applied for a private ruling on whether it was exempt from income tax under s 50-40 of the Income Tax Assessment Act 1997 [equivalent to s 23(h) of the ITAA 1936]. The Commissioner ruled that CBH did not satisfy either the positive or negative limbs of s 50-40 on the basis that it was not an association established for the purpose of promoting the development of Australian agricultural resources and was carried on for the profit or gain of its members. CBH objected against the 2008 ruling. The Commissioner determined the objection adversely to CBH, and CBH appealed against the objection decision. The Court was confined in its consideration by the scheme description set out in the Commissioner's ruling and so did not consider evidence or make any findings of fact. | At first instance, Gilmour J [2010] FCA 508 rejected the Commissioner's submission that the "development of agricultural resources" is confined to the farm side of the "farm gate" and concluded that the term "agricultural resources" has a broader meaning than the word "agriculture". He held that it would be artificial to distinguish the product of agriculture and the means by which it is handled in bulk from the activities of planting, growing and harvesting inside the "farm gate". His Honour concluded that CBH was and continues to be established primarily for the purpose of promoting the development of the grain growing industry of Western Australia and that the current and proposed activities of CBH are evolutionary in character and not static. | His Honour concluded that CBH is not carried on for the individual profit or gain of its individual members, as it cannot distribute its assets but must apply them only to the furtherance of its objects. CBH's members benefit from its activities not because they are members but because they are growers. | Issues decided by the Full Federal Court | A majority of the Full Court (Mansfield, McKerracher JJ, Siopis J dissenting) confirmed the decision of Gilmour J that the activities of CBH regarded as a whole are directed primarily to "promoting the development of agricultural resources of Australia" being the grain growing industry in WA. They concluded that "promoting the development of agricultural resources" in the expression extends beyond what is done on the farm or nearby. The expression includes developing the range of resources available to facilitate and support agriculture. The purpose for which CBH was established must be determined by considering globally all activities of CBH against the whole legislative expression. | The majority concluded that conducting activities in an efficient and profitable manner did not exclude CBH from eligibility for exemption. The exemption assumes a profit and can only apply to profits, so seeking to operate profitably cannot be inconsistent with a purpose of promoting development. | The majority agreed with Gilmour J that CBH was established to promote the interests of the grain industry as a whole and not for the benefit of individual members. Benefits to members did not arise because they are members but because they are grain growers. While the majority concluded that the statutory prohibition on distribution or application of assets for the benefit of CBH's members is not determinative they said it is an important consideration. | Accordingly CBH was entitled to endorsement as an income tax exempt association under Item 8.2(a) of section 50-40 ITAA97. | Siopis J, in dissent, considered that, on the scheme to which the ruling related, CBH is not established for promoting the development of agricultural resources and is carried on for the profit or gain of its individual members.

Issues decided:
A majority of the Full Court (Mansfield, McKerracher JJ, Siopis J dissenting) confirmed the decision of Gilmour J that the activities of CBH regarded as a whole are directed primarily to "promoting the development of agricultural resources of Australia" being the grain growing industry in WA. They concluded that "promoting the development of agricultural resources" in the expression extends beyond what is done on the farm or nearby. The expression includes developing the range of resources available to facilitate and support agriculture. The purpose for which CBH was established must be determined by considering globally all activities of CBH against the whole legislative expression. The majority concluded that conducting activities in an efficient and profitable manner did not exclude CBH from eligibility for exemption. The exemption assumes a profit and can only apply to profits, so seeking to operate profitably cannot be inconsistent with a purpose of promoting development. The majority agreed with Gilmour J that CBH was established to promote the interests of the grain industry as a whole and not for the benefit of individual members. Benefits to members did not arise because they are members but because they are grain growers. While the majority concluded that the statutory prohibition on distribution or application of assets for the benefit of CBH's members is not determinative they said it is an important consideration. Accordingly CBH was entitled to endorsement as an income tax exempt association under Item 8.2(a) of section 50-40 ITAA97. Siopis J, in dissent, considered that, on the scheme to which the ruling related, CBH is not established for promoting the development of agricultural resources and is carried on for the profit or gain of its individual members.

ATO view of decision:
On the scheme as set out in the Private Ruling, the Commissioner took the view as a matter of fact that the business of CBH was a business of bulk receiving, transport, storage, blending and loading of grain and that the level of activity directed at promoting the development of the grain growing industry in WA was insignificant in relation to day to day bulk handling activities. Nevertheless it was open to the court to conclude as a matter of fact on the scheme set out that a significant proportion of the current and proposed activities of CBH were evolutionary in character and guided by an intent to promote the development of the grain growing industry and therefore to conclude that CBH was established primarily for the relevant statutory purpose. | The Commissioner accepts that the statutory expression requiring the entity to be established for the purpose of "promoting the development of agricultural resources of Australia" is a composite expression with a broader application than the component words. Thus the reference to "promoting the development of agricultural resources" in that context is not limited to promoting activities on the farm side of the farm gate. The expression requires a global review of the activities of the relevant entity to determine the principal or dominant purpose for which it is established. | The majority concluded that, on the scheme as set out in the ruling, a combination of the terms of the articles and the governing statute precluded the possibility that any profit or gain would go to members individually, including on a wind up of the entity. It was open to the court to conclude on the scheme as a matter of fact that any incidental gain or benefit which may be received by members is not received by virtue of the membership but only in common with all grain growers in WA.

Administrative treatment:
Implications on current Public Rulings & Determinations | In light of this decision, Taxation Ruling IT 2415 has been reviewed. No direct conflict is evident. Whilst IT 2415 is written in limited terms, and there has been legislative change and a development of case law since its publication, the ATO does not see a need to take any action at this time to provide a broader range of advice.

Legislative references: Income Tax Assessment Act 1997 50-40 - Item 8.2(a)
Subject references: Income tax Exemption Society or association established for the purpose of promoting the development of Australian agricultural resources Carried on for the profit or gain of its individual members