Private ruling: Non-assessable non-exempt income
Date of advice: 14 October 2020
Published: November 2020
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Would the payment of a sinking fund to a related co-operative impact any previous treatment of Sinking Fund Levy (SFL) contributions as non-assessable non-exempt income under section 59-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Would the payment of a sinking fund to a related co-operative impact that co-operative's status as an income tax exempt public authority under section 50-25 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: X is a non-distributing co-operative with share capital under section 17(2) of the Co-operatives National Law that was enabled under the Co-operatives (Adoption of National Law) Act 2012 (NSW) and commenced in NSW on 3 March 2014. Structure X has operated under a "dual co-operative structure" with Y. X has responsibility for, and its objects are specifically directed to, providing for the future maintenance, refurbishment and replacement of Y's infrastructure. X is responsible for business planning to ensure there is sufficient funding available to support the future refurbishment and replacement of Y's infrastructure. X collects an annual SFL from its members for its future needs. The rules of Y and X make membership of one entity conditional on membership of the other. X is currently unable to fulfil its objects due to incompatibilities of the dual co-operative structure with state legislation, which was implemented after the dual co-operative structure was established. As such, in the future Y will be performing the roles currently undertaken by X. Therefore, the need for the dual co-operative structure no longer exists. This will include X ceasing to collect SFL contributions, and Y collecting contributions for its own sinking fund. X will use its sinking fund until it has been used entirely. Once this has occurred, it is intended that X may be wound up. X is restricted in the activities it may carry out, including the use of its sinking fund, by its objects. These are contained in X's rules. X is not able to own assets as originally contemplated by the dual co-operative structure. It may only expend its sinking fund for the benefit of members on the refurbishment, replacement and maintenance of Y's assets in accordance with its objects. X's maintenance plan forecasts that it could take as long as xx years to use all of X's sinking fund before X can be wound up. X is therefore seeking to transfer all the X sinking fund to Y as a single transaction to be used in a manner that is consistent with both the state legislation and Y's objects. This will result in significant financial and operational efficiencies for both entities, which can be passed on as savings to the members. As set out above, leaving the sinking fund in X would result in that entity operating for a number of years with the related unnecessary costs of running a co-operative, until all funds are expended under the existing rules. The Proposed Transaction Due to the inconsistency of the dual co-operative structure with the state legislation, X is not able to use its sinking fund as contemplated by that structure. In particular, X cannot utilise these funds in a way that would result in X owning any replacement infrastructure. Y and X have recently undertaken a restructure. As part of this, Y is a non-distributing co-operative and has put in place a framework so that it can collect, manage and use its own sinking fund for the replacement and refurbishment of its assets. On this basis, X has ceased collecting the SFL contributions (subject to the requirement that it continue to collect a nominal levy of at least one dollar from each member). X will pay the entire sinking fund to Y as one lump sum transfer for future expenses to be incurred in relation to the maintenance, replacement and refurbishment of Y's infrastructure. That is, the sinking fund is being paid to Y for the same purpose that it was being held by X.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-25 | Income Tax Assessment Act 1997 section 59-35

Reasons for decision: Summary: The payment of X's sinking fund to Y will not impact any previous treatment of SFL contributions as NANE income under section 59-35 of the ITAA 1997. | Detailed Reasoning - Detailed Reasoning: In Coleambally Irrigation Mutual Co-operative Ltd v FC of T 2004 ATC 4835 , the Full Federal Court held that the mutuality principle cannot apply where an organisation is precluded from distributing to members on winding up. However, under section 59-35 of the ITAA 1997, ordinary income is treated as NANE income if it would have been a mutual receipt but for the entity's constituent document preventing the entity from making any distribution to its members. The member contributions (the sinking fund levies) paid to X's sinking fund meet the requirements for mutuality but for the fact X is a non-profit entity that is prohibited from distributing funds to members. That is, the contributions are made to the sinking fund for a common purpose, there is complete identity between the members that contribute to the sinking fund and the members that are entitled to benefit from the sinking fund and the interaction by members in respect of the common fund is not in the nature of trade 1 . Since Y has identical membership to X, the sinking fund is to be transferred to Y for the same purpose, the common fund and principles of mutuality would still apply. Therefore, if the sinking fund is transferred to Y, it would not affect the treatment of these contributions as NANE income by X given the payment does not disrupt the elements of mutuality. In conclusion, the payment of X's sinking fund to Y will not impact any previous treatment of SFL contributions as NANE income under section 59-35 of the ITAA 1997. | Summary: The payment of X's sinking fund to Y will not impact Y's status as an income tax exempt public authority under section 50-25 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Y is an income tax exempt public authority under section 50-25 of the ITAA 1997. The transfer of the SFL from X to Y is for the future maintenance, refurbishment and replacement of Y's infrastructure which aligns with the purpose of Y. In conclusion, the transfer of X's sinking fund to Y will not impact Y's status as an income tax exempt public authority under section 50-25 of the ITAA 1997. 1 Principle of mutuality as expressed in Revesby Credit Union Cooperative Ltd v Federal Commissioner of Taxation (1965) 112 CLR 564 at 574-575.