Private ruling: The exercise of the Commissioner’s discretion in relation to deductions allowable to a co-operative company
Date of advice: 13 August 2018
Published: November 2018
Ruling period: 1 October 2018 to 30 September 2023
Date scheme commenced: 1 October 2018

Ruling: Q1: Would the Commissioner exercise his discretion under subsection 120(6) of the Income Tax Assessment Act 1936 (ITAA 1936) to enable you to deduct dividends and rebates to be paid to your members within a specified period after the end of your income year as if they had been made on the last day of your income year? | A1: Yes

Relevant facts and circumstances: You are a co-operative company for the purposes of Division 9 of the ITAA 1936. You predominantly operate within one State and you have a large number of members. Your primary activities involve the supply of specific goods and the provision of services to your members. You have a large annual turnover. The Rules of your co-operative provide that your year of income commences in October and ends in the following September. You have a substituted accounting period for taxation purposes. The Rules of your co-operative provide that the co-operative may dispose of any surplus arising in any year of income from the business in the manner prescribed by the relevant State laws. Those State laws provide that you may apply part of the surplus, or your reserves, by: (a) a distribution to members as a rebate on the value of business done by each member with the co-operative (b) the issue to members of bonus shares, or (c) the issue to members of a limited dividend for shares held by each member. The Rules, in conjunction with the relevant State law, provide that an Annual General Meeting must be held within a specified period of the end of your year of income. The relevant State laws further provide that the financial, director’s and auditor’s reports (including dividends or distributions recommended for payment to your members) must be presented to your members for consideration at the Annual General Meeting. The Rules also provide that you must prepare financial reports and statements and the ordinary business of the Annual General Meeting includes the financial statements for the year of income and a report on your state of affairs. The Rules further provide that you must appoint a reviewer of your financial statements that are to be presented to the members at the annual general meeting. As a result it is not practical to convene the Annual General Meeting within three months of the end of your year of income. It follows that it is also not practical to make payment of any rebate, bonus shares or dividend to your members within the period of three months of the end of your year of income. You have not made a distribution to your members in recent years.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 9 | section 120 | subsection 120(1) | subsection 120(6)

Reasons for decision: Summary: Subsection 120(1) of the ITAA 1936 provides that a co-operative company may claim an allowable deduction for assessable income distributed to the co-operative’s shareholders as rebates or bonuses based on the business done by shareholders with the co-operative company or distributed to shareholders as interest or dividends on shares. For the purposes of the allowable deduction, subsection 120(6) of the ITAA 1936 provides that, if a co-operative company distributes assessable income amongst its shareholders within the period of three months starting at the end of a year of income, the co-operative company may elect that this distribution is to be taken, for the purposes of section 120 of the ITAA 1936 only, to have been made on the last day of that year of income. The making of such an election means that the deduction for the distribution made would be allowable to the co-operative company in the previous year of income. Where a co-operative company does not make an election under subsection 120(6) of the ITAA 1936, or the distributions of assessable income made to the shareholders are not within the three months of the end of the year of income, any deduction for a co-operative company would be allowable in the year the distributions are paid, or become payable, to the shareholders. See the decision in Ardmona Fruit Products Co-operative Co Ltd v FC of T (1952) 86 CLR 530. The Commissioner has the discretion to extend the three month period specified in subsection 120(6) of the ITAA 1936. In considering the exercise of this discretion, the Commissioner would have regard to certain factors relevant to your specific circumstances. Taking the above factors into consideration, the Commissioner would exercise the discretion provided under subsection 120(6) of the ITAA 1936 to enable you to deduct dividends and rebates paid to your members from assessable income within a specified period following the end of your year of income, as if they had been made at the end of your income year.