Private ruling: Section 117(1)(a) and 117(1)(b) of the Income Tax Assessment Act 1936 ?
Date of advice: 1 June 2016
Published: August 2017
Ruling period: Year ended 30 June 20BB | Year ended 30 June 20CC | Year ended 30 June 20DD | Year ended 30 June 20EE | Year ended 30 June 20FF
Date scheme commenced: 1 July 20AA

Ruling: Q1: Will the transactions proposed by the Entity satisfy the requirement that the primary object or objects of the Entity include the acquisition of commodities or animals for disposal or distributions as listed in subsection 117(1)(a) or 117(1)(b) of the Income Tax Assessment Act 1936 ? | A1: No.

Relevant facts and circumstances: 1. The Entity is a locally owned member based co-operative. 2. The Entity’s constitution limits the total holding of any one shareholder. 3. The quotation of the Entity’s shares on a stock exchange is also prohibited by the Entity’s constitution. 4. The Entity has all the powers of a natural person and the doctrine of ultra vires does not apply. 5. The Entity has previously been issued with a private ruling confirming that they were a cooperative company for the purposes of the ITAA 1936 based on the services that they were providing to their members at the time that ruling was issued. 6. Due to ongoing expansion of operations and shareholder base, the Entity is consistently looking for new ways in which it can benefit its members. 7. The Entity intends to expand its services to include trading in statutory rights.

Relevant legislative provisions: Corporations Act 2001 former Section 9 | Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1936 Section 117 | Income Tax Assessment Act 1936 former Subsection 160AEA(3) | Income Tax Assessment Act 1997 Section 995-1 Case Law | Sydney Futures Exchange Limited v Australian Stock Exchange Limited and Australian Securities Commission (Intervener) (1995) 56 FCR 236 | Renmark Fruitgrowers Co-operated Limited v FC of T (1969) 121 CLR 501 | Brookton Co-operative Society Ltd v Federal Commissioner of Taxation ( Brookton ) (1981) 11 ATR 880

Reasons for decision: Summary: The proposed transactions do not constitute commodities for the purposes of section 117(1)(a) or 117(1)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) and if these activities are undertaken the Entity will not be a cooperative company for the purposes of Division 9 of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: The proposed scheme The proposed scheme relates to the buying, selling and leasing of statutory rights. Meaning of a co-operative company for the purposes of section 117 of the Income Tax Assessment Act 1936 (ITAA 1936) In order to be considered a co-operative company an entity must meet the requirements under section 117 of the ITAA 1936. This section relevantly provides: (1) 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. In essence, to satisfy the definition of a co-operative for the purposes of Division 9 of the ITAA 1936, a co-operative company must: ● not be a friendly society dispensary ● have rules which limit the number of shares which may be held by, or by and on behalf of, any one shareholder ● have rules which prohibit the quotation of the shares for sale or purchase at any stock exchange or in any public manner whatever, and ● be established for the purpose of carrying on any business having as its primary object or objects one or more of objectives (a) to (e). 1. Not being a friendly society dispensary In order to meet the definition of a cooperative for the purposes of section 117 of the ITAA 1936, the cooperative must not be a friendly society dispensary. A friendly society dispensary is defined in the section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an approved pharmacist that is a friendly society or body. The Entity is not a friendly society dispensary. 2. Limit on shares In order to meet the definition of a cooperative for the purposes of section 117 of the ITAA 1936, the rules of the company must limit the number of shares that may be held by or by and on behalf of any one shareholder. The constitution of the Entity limits each shareholder to a certain number of shares. 3. Prohibition against listing on stock exchange In order to meet the definition of a cooperative for the purposes of section 117 of the ITAA 1936, the rules of the company must prohibit the quotation of the shares of the company for sale or purchase at any stock exchange, or in any public manner whatever. The constitution of the Entity prohibits the listing of the shares on a stock exchange. 4. Established for a relevant section 117 purpose In order to meet the definition of a cooperative for the purposes of section 117 of the ITAA 1936, the Entity must have its primary object (or objects), one of those items listed in subsection 117(1)(a) through (e) of the ITAA 1936. The purpose for which a company is established must be determined at the time when a company’s status as a co-operative is under examination. Menzies J, in Renmark Fruitgrowers Co-operated Limited v FC of T (1969) 121 CLR 501 noted that the use of the present tense in the context of words ‘is established’ ensures that one must look to the company’s activities at the relevant time, rather than simply at the time of the company’s inception. the Entity must therefore have as its primary object (or objects) during the relevant periods, being 1 July 2017 to 30 June 2022, one of those items listed in subsection 117(1)(a) through (e) of the ITAA 1936: 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 for certain purposes. To date, this has been satisfied by the Entity via the rendering of services to its members under section 117(1)(d) of the ITAA 1936. However, the proposed activities in relation to the acquisition and trading of statutory rights must be considered in light of the items listed in subsection 117(1) of the ITAA 1936. Subsections 117(1)(a) and (b) deals with the acquisition of commodities or animals for disposal or distribution among its shareholders and the acquisition of commodities or animals from its shareholders for disposal or distribution. You have stated that no trading in animals will take place. Therefore, the meaning of ‘commodity’ for the purposes of subsections 117(1)(a) and (b) of the ITAA 1936 is crucial to an understanding of whether the proposed scheme involves the acquisition of commodities for the purposes of section 117(1) (a) and (b) of the ITAA 1936. Is a statutory right a ‘commodity’ for the purposes of section 117 of the ITAA 1936? The meaning of ‘commodity’ is not directly defined in either the ITAA 1936 or the ITAA 1997. However, reference to a commodity is made in the definition of ‘passive commodity gain’ in section 6 of the ITAA 1936 where it is stated: passive commodity gain , in relation to a taxpayer, in relation to a year of income, means a gain realised by the taxpayer in a year of income from disposing of a forward contract or a futures contract, or a right or option in respect of a forward contract or a futures contract, in respect of any thing (a commodity ): (a) that is capable of delivery under an agreement for its delivery; and (b) that is not an instrument creating or evidencing a chose in action; unless the contract, right or option relates to the carrying on by the taxpayer of a business: (c) of producing or processing the commodity; or (d) that involves the use of the commodity as a raw material in a production process. (a) and (b) (the first limb) in the above definition provides that a ‘commodity’ is something that is capable of delivery under a contract, but does not include an instrument creating or evidencing a chose in action. (c) and (d) (the second limb) provides that a gain realised by a taxpayer is not a ‘passive commodity gain’ if the contract, right or option relates to the carrying on by the taxpayer of a business of producing or processing the commodity, or a business that involves using the commodity as a raw material in a production process. The fact that a taxpayer carries on a relevant business does not make a chose in action a commodity, it prevents the contract, right or option from falling within the meaning of ‘passive commodity gain’ and thus including the gain within the calculations of passive income and the tax consequences associated with passive income. Former subsection 160EA(3) of the ITAA 1936 also defined a commodity as: any thing that is capable of delivery under an agreement for its delivery, but does not include an instrument creating or evidencing a chose in action. This section was rewritten and the definitions of ‘commodity’, ‘passive commodity gain’ and ‘passive commodity investment’ were moved to the definition of section 6(1) of the ITAA 1936 as a result of Tax Laws Amendment (2007 Measures No. 4) Act 2007. Despite some rewording and the removal of the words ‘passive commodity investment’ the meaning of ‘commodity’ was not expanded. A chose in action continued to be excluded from the definition of ‘commodity’. The Australian Oxford Dictionary defines a ‘commodity’ as an object of trade, especially a raw material, and a useful thing. The Macquarie dictionary defines ‘commodity’ as a thing that is of use or advantage and an article of trade or commerce. While these definitions are wide, they both refer to an object or thing of use or advantage. You have made the argument that prior to the assent and commencement of the Financial Services Reform Ac t 2001 ( Financial Services Reform Ac t), former section 9 of the Corporations Act 2001 (the Corporations Act ) provided a relevant definition of ‘commodity’ as follows: (a) any thing that is capable of delivery pursuant to an agreement for its delivery; or (b) without limiting the generality of paragraph (a), an instrument creating or evidencing a thing in action; The definition of ‘commodity’ in the Corporations Act was repealed with the introduction of the Financial Services Reform Act.’ Commodity’ is not defined in the Financial Services Reform Act . The first limb, (a) is consistent with the definition of commodity found in subsection 6(1) of the ITAA 1936, being a thing ‘capable of delivery pursuant to an agreement for its delivery.’ On the other hand, the second limb, (b) extended the definition for Corporations Act purposes to include ‘an instrument creating or evidencing a thing in action’ which is specifically excluded from the definition of ‘commodity’ within the definition of ‘passive commodity gain’ in the ITAA 1936. The meaning of ‘commodity’ in former section 9 of the Corporations Act was discussed in Sydney Futures Exchange Limited v Australian Stock Exchange Limited and Australian Securities Commission (Intervener) (1995) 56 FCR 236 ( Sydney Futures Exchange) . This case considered whether a particular type of option was a futures contract and therefore ineligible to be traded on the Australian Stock Exchange. The factual matrix on which that case was decided is therefore very different to the proposed trade in statutory rights. The comments of the court in Sydney Futures Exchange related to whether the particular option in that case met the definition of ‘commodity’ contained in section 9. In coming to a decision and after considering the Oxford and Macquarie dictionary definitions of ‘commodity’, Lockhart J provided the following comments in respect of the first limb of the former Corporations Act definition of ‘commodity’: The word “commodity” can therefore bear a wide meaning; but in my view, in the context of the definition of “commodity” in the Corporations Law, for there to be a thing “capable of delivery” it means capable of delivery in the sense of the physical delivery of tangible property or possibly a document evidencing a title to the property (emphasis added). While Lockhart J accepted that ‘commodity’ can bear a wide meaning in relation to the first limb of the definition, he emphasised that for the thing to be something capable of delivery, it must be capable of delivery in a physical sense. It is not necessary to consider whether the statutory rights would fall within the expanded definition of ‘commodity’ in the second limb of the definition in former section 9 of the Corporations Act . The expanded definition is more applicable to futures contracts which are a form of financial commodity for Corporations Act purposes only (as was the case in Sydney Futures Exchange) . The definition of ‘commodity’ found within the definition of ‘passive commodity gain’ in the ITAA 1936, dictionary definitions and former section 9 of the Corporations Act have all been considered. In this instance, it is considered that the ITAA 1936 definition of ‘commodity’ found within the definition of ‘passive commodity gain’ is a more appropriate guide as it is contained in the same legislative instrument as section 117. The comments of Lockhart J, discussed above, can also be considered in the application of the ITAA 1936 definition given that the first limb of former section 9 contains the same wording. As such, for the purposes of section 117 of the ITAA 1936 a commodity is something that is capable of delivery under an agreement for its delivery and not being an instrument creating or evidencing a chose in action. Statutory rights are not a ‘thing capable of delivery.’ In any event, as the transactions proposed by the Entity relate to trading in statutory rights they cannot be commodities as they are a chose in action. They have no existence other than by the recognition given by the law and confer no present possession of a tangible object. Therefore, for the purposes of section 117 of the ITAA 1936, statutory rights are not considered to be a ‘commodity’. As such, any trading in statutory rights will not result in the acquisition of commodities either from, or for trading onwards to, the Entity shareholders. Therefore, if the Entity were to engage in the statutory rights trade it could not be said that the Entity was established for a relevant section 117(1)(a) or (b) purpose. This would be the case even in the Entity were to continue carrying out the rendering of services to its members under section 117(1)(d). Should a company engage in several businesses, all must have as their primary object(s) one or more of those listed in paragraphs 117(1)(a) to (e). In Brookton Co-operative Society Ltd v Federal Commissioner of Taxation ( Brookton ) (1981) 11 ATR 880 at 897 Justice Aicken stated that If in any particular year the company is not "established", in the sense of being brought into or kept in operation for the purpose of carrying on a business having the requisite primary object, then the fact that it may in that year carry on that business will not be sufficient to make it a co-operative company… It is not in my opinion a question of seeking some "principal or dominant purpose"; it is not the same kind of inquiry as is necessary in relation to the ascertainment of "the primary object or objects" of a business actually carried on. If a company is kept in operation in a particular year for the purpose of carrying on a business having as its primary object one of the permitted activities and also for the purpose of carrying on some other activity or for a purpose of carrying on some other business, then it will not qualify as a co-operative company unless that other business has as its primary object one of the permitted activities… If it embarks on or carries on two or more businesses, only one of which falls within the permitted list, then in my opinion it cannot be said to have been established, ie brought into or kept in operation for the purpose of carrying on the co-operative business but is so maintained for the purpose of carrying on both the permitted business and the other businesses” (emphasis added). Summary As the proposed transactions do not involve acquiring commodities, any trading in statutory rights will not result in the acquisition of commodities either from or for trading on to, the Entity’s shareholders. As such the transactions proposed by the Entity will not satisfy the requirement that the primary object or objects of the Entity include the acquisition of commodities or animals for disposal or distribution as listed in subsection 117(1)(a) or 117(1)(b) of the ITAA 1936.