Private ruling: Co-operative companies
Published: March 2014
Ruling period: 1 July 2000 to 30 June 2012
Date scheme commenced: 1 July 2000

Ruling: Q1:  | A1:  | Q2:  | A2: 

Relevant facts and circumstances: The entity was formed in 19XX. In 19YY a new constitution was adopted. The entity has a retail store. The store's main customers are the general public. Products to stock the retail store are sourced from members and non-members. The entity retains X% of the sale price from items sourced from members and retains Y% of the sales price from items sourced from suppliers who are non-members. The amount retained from the non-member suppliers is considered to be a commission. When a sale is made in the retail store it is recorded and the supplier of that item (whether a member or non-member) is paid the sale proceeds less the retained commission. The retained commission is used to pay rent, overheads, hold exhibitions, promote items or pay for necessary leasehold improvements (as required by the landlord). It is a condition of membership that members must volunteer a number of days in the retail store. They receive no remuneration for their time. A small distribution is made to members. The maximum dividend paid to each member has been limited to the number of shares held, with a maximum of X shares per member. The argument of the society is that they should be a not-for-profit entity and should not be taxed as their members are ultimately taxed on the distributions made to them.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 117 | Income Tax Assessment Act 1936 Section 118 | Income Tax Assessment Act 1936 Section 120

Reasons for decision: Detailed Reasoning - Issue 1: Does the entity meet the requirements to be considered a Co-operative Company? | Detailed Reasoning - Question 1: Is income tax payable by this co-operative for the income years requested by the Tax Office? | Summary: The entity does not satisfy the conditions of section 118 of the Income Tax Assessment Act 1936 (ITAA 1936) as it does not carry out 90% of its business with members. The reporting requirements for the entity should be reviewed and returns lodged accordingly. | Detailed Reasoning - Detailed reasoning: Sections 117 and 118 of Division 9 of the ITAA 1936 lay down the tests for determining whether a company qualifies as a co-operative company for income tax purposes. Subsection 117(1) of the ITAA 1936 states: 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 other 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. Section 118 of the ITAA 1936 further states: 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. At present the entity owns and operates a retail store. This activity can be seen to comply with the objectives as stipulated in paragraph 117(1) of the ITAA 1936. For the relevant period the Income and Expenditure Statement has been provided. Income received includes sales, bank interest, postage and sundry. Cost of Goods Sold has been split between 'Purchases from Members' and 'Retail Stock Purchases'. The principal source of income for the entity was from sales. In each income year in review the value of commodities acquired from the shareholders of the entity was less than 90% of the total value of sales. Therefore, the entity does not satisfy the conditions of section 117 of the ITAA 1936 as it does not carry out 90% of its business with members. The entity does not meet the requirements to be considered a co-operative company for the purposes of section 117 and 118 of the ITAA 1936. | Detailed Reasoning - Question 2: If income tax is payable, can the co-operative claim a deduction for the distribution to members? | Summary: The entity does not meet the requirements to be considered a co-operative company for the purposes of section117 of the ITAA 1936 as less than 90% of its business is conducted with members. As a result the entity is not entitled to claim a deduction under section 120(1). | Detailed Reasoning - Detailed reasoning: It is necessary to analyse the activities carried on by a co-operative company on a year to year basis to determine the primary object or objects of the business. This analysis may alter the company's status from year to year. As such, deductions under section 120 of the ITAA 1936 will only apply if the co-operative remains a co-operative company under Division 9 of the ITAA 1936 in the respective income year. The entity does not meet the requirements to be considered a co-operative company for the purposes of section118 of the ITAA 1936 as less than 90% of its business is conducted with members. As a result the entity is not entitled to claim a deduction under section 120(1).

Subject: Co-operative companies: Question 1 Is income tax payable by the co-operative for the income years requested by the Tax Office? | Answer Yes, the entity does not meet the legislative requirements to be considered a co-operative company. | Answer No, the entity does not meet the legislative requirements to be considered a co-operative company and as a result is not entitled to claim a deduction under section 120(1) of the ITAA 1936.