Taxation Ruling TR 2004/5


Class of entities or scheme: 7. This Ruling applies to persons who enter into or carry out the following or similar arrangements: 8. This Ruling applies both before and after its date of issue. However the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20). 9. The Ruling below is divided into three sections to deal with the three possible ways in which the arrangement can be characterised depending on the facts. | (a) Retailer entitled to volume rebate but association receives it as agent: 10. The consequences set out in paragraphs 11 to 16 follow if, as set out in paragraph 32, the retailer is entitled to the volume rebate but the association receives it as agent for the individual retailer entitled to receive it, or as a convenient agent for all of the retailers collectively. | Entitlement of retailer to volume rebate: 11. The volume rebate is, under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), assessable income of the retailer in the income year in which it becomes due and payable (or, if the retailer is on a cash basis of accounting, when it is received). | Receipt of volume rebate by association: 12. Correspondingly, the volume rebate is not included in the association's assessable income under section 6-5 of the ITAA 1997. 13. The retailer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the volume rebate that goes to the association. | Expenditure incurred by association on behalf of retailers: 14. A loss or outgoing would be incurred by the retailer when the association incurs expenditure on the retailer's behalf. Whether this loss or outgoing is deductible to the retailer under section 8-1 or any other provision of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997 would depend on whether the requirements of the relevant provisions are satisfied. | Return of excess rebates to a retailer: 15. Excess rebates returned to the retailer by the association, or becoming available for return, are not included in the retailer's assessable income under section 6-5 of the ITAA 1997. 16. No deduction is allowable to the association under section 8-1 of the ITAA 1997 when it returns excess rebates to a retailer. | (b) Retailer entitled to volume rebate but redirects it to association: 17. The consequences set out in paragraphs 18 to 22 follow if, as set out in paragraph 66, the retailer is entitled to the volume rebate but redirects it to the association so that the association does not receive it as agent for the retailers either individually or collectively. In this situation the volume rebate is called a 'redirected' volume rebate. | Entitlement of retailer to volume rebate: 18. The redirected volume rebate is, under section 6-5 of the ITAA 1997, assessable income of the retailer in the income year in which it becomes due and payable (or, if the retailer is on a cash basis of accounting, when it is received). | Redirection of volume rebate to association: 19. The retailer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the mere redirection of the volume rebate when it goes to the association. Although the in toto redirection of the volume rebates to the association is not a deduction per se, a deduction may be available to a retailer for some part of the redirected rebates when that part is subsequently outlaid. Whether this is so depends on all the facts and circumstances including what the loss or outgoing is for and the application of any relevant provision of the ITAA 1936 or the ITAA 1997. Certainly, the redirected volume rebates would not be a deductible loss or outgoing to the extent that they are returned, or available for return, to the retailer. 20. The redirected volume rebate is, under section 6-5 of the ITAA 1997, assessable income of the association in the income year in which the redirection occurs. | Return of excess rebates to a retailer: 21. Excess rebates returned to the retailer by the association, or becoming available for return, are included in the retailer's assessable income under section 6-5 of the ITAA 1997. 22. No deduction is allowable to the association under section 8-1 of the ITAA 1997 when it returns excess rebates to a retailer but section 120 of the ITAA 1936 may allow a deduction if the association is a co-operative company under section 117. | (c) Association entitled to volume rebate: 23. The consequences set out in paragraphs 24 to 27 follow if, as set out in paragraph 81, the association rather than the retailer is entitled to the volume rebate from the wholesaler. | Entitlement of association to volume rebate: 24. Section 6-5 of the ITAA 1997 applies to include in the association's assessable income the volume rebate to which it is entitled. | Payment of excess rebates to a retailer: 25. If the retailer is a shareholder in the association and the payment of the excess rebates is a distribution of the association's profits, section 44 of the ITAA 1936 applies to include the amount in the retailer's assessable income on the basis that it is a dividend paid out of profits. No deduction would be available to the association for the return of the excess rebates in these circumstances. 26. However, if this is not the case, section 6-5 of the ITAA 1997 applies to include any excess rebate paid to the retailer by the association in the retailer's assessable income when the retailer derives it. This will be when the excess rebates become due and payable (or, if the retailer is on a cash basis of accounting, when the excess rebate is received). In these circumstances, a deduction would be allowable under section 8-1 of the ITAA 1997 to the association for the payment of excess rebates to retailers. | The association is not a co-operative company: 27. The association is not a co-operative company under section 117 of the ITAA 1936. | Possible legal characterisations of the arrangement: 28. The explanation below is divided into three main sections to deal with the three possible ways in which the arrangement can be legally characterised. Those ways are that: 29. How the arrangement is characterised will depend on the intentions of the relevant parties as reflected, among other things, in the association's constituent documents and agreements between the retailers, the association and the wholesaler. In each case, the physical cash flows are the same but their legal character is different. 30. It is the Commissioner's view that the characterisation in paragraph 28(a) reflected the true legal nature of the actual arrangements of this kind. The characterisation in paragraph 28(b) was contended by certain parties to those arrangements, but it was not found in the cases examined. The Commissioner does not believe that the consequences of the characterisation in paragraph 28(b) as set out in this Ruling would be likely to arise. The examination of actual arrangements suggests that features which would take arrangements from the characterisation in paragraph 28(a) to the characterisation in paragraph 28(b) require explicit decisions and actions which are practically very onerous and improbable for retailers to take. However, this Ruling deals with the consequences of the characterisation in paragraph 28(b) in case it does apply. 31. Paragraph 7(viii) referred to the possible interposition of an umbrella body between the wholesaler and the association. This would make no difference to the characterisation or the tax consequences of the arrangements covered by this Ruling because the umbrella body, in substance, plays a similar role to the wholesaler. | Retailer entitled to volume rebate but association receives it as agent (characterisation in paragraph 28(a)): 32. Under this characterisation: 33. This characterisation can be diagrammatically represented as follows: | Reasons for characterisation in paragraph 28(a): Basis upon which the association receives volume rebates (paragraph 32(i)) 34. Whether the legal nature of the arrangement falls under the characterisation in paragraph 28(a) depends on whether an agency relationship can be shown to exist in relation to the collection of the volume rebates. 35. Butterworths Australian Legal Dictionary (1997) defines 'agency' as follows: 36. Hence, there is an agency relationship between the association and the retailer as to the collection of volume rebates if the association is authorised by the retailer to collect the volume rebates on its behalf. This authority may be conferred expressly or impliedly. (On implied agency, see definition of agency quoted above. For those interested in a fuller explanation of implied agency, see GE Dal Pont, Law of Agency, Butterworths, 2001, pages 93-96.) 37. Examples of factors supporting the conclusion that there is at least an implied agency relationship between the retailer and the association in relation to the collection of volume rebates would include the following: 38. It should be noted that this is not an exhaustive list. Hence, there may be other factors not listed here that support the conclusion that there is either an express or implied agency relationship regarding the receipt of volume rebates. Also, even though one or more of the above factors is not present does not mean that such a relationship does not exist. 39. Where the rebates are received on behalf of the retailers but the facts do not support the conclusion that the association collects the volume rebates as agent for each retailer individually, then it will follow that the association must receive them directly into a common fund for the common benefit of all the retailers as the convenient agent of all of them collectively. Basis upon which the association holds volume rebates (paragraph 32(ii)) 40. In the typical type of arrangement dealt with by this Ruling, the rebates to which an individual retailer is entitled are regularly returned to that retailer after deducting expenses incurred either on that particular retailer's behalf or for the common benefit of all retailers. This supports the conclusion that the rebates are held on the individual retailer's behalf. 41. There is no inconsistency between the association holding money on behalf of an individual retailer and being authorised to spend it either for the benefit of the individual retailer or for the common benefit of all retailers. 42. Also, that each retailer's funds are not generally held in a separate account is not inconsistent with the association holding them as agent for the particular retailer. This simply means that the association's relationship in respect of those funds is debtor, not trustee. Dal Pont, at page 320, describes this difference, relevantly, as follows: 43. If the facts do not support the conclusion that the association holds the funds from the rebates for each retailer individually, then they would normally support the conclusion that the association holds the funds from the receipt of the rebates in a common fund for the common benefit of all the retailers. This would usually be evident from the purpose for which the funds are held which could be inferred from the uses to which the funds are put and how the retailers benefit from the fund. Basis upon which the association uses the funds (paragraph 32(iii)) 44. That the association has authority to spend each retailer's funds either for the individual retailer's benefit or for the common benefit of all retailers is typically apparent from the formula used in the association's agreement with the retailers to calculate how much surplus each retailer is entitled to. | Taxation consequences of characterisation in paragraph 28(a): Assessability to retailers of volume rebates paid by wholesaler 45. Section 6-5 of the ITAA 1997 includes ordinary income in a taxpayer's assessable income when it is derived by the taxpayer. The volume rebates would be derived by the retailer in the income year in which they become due and payable or, if the retailer is on a cash basis of accounting, they would be derived by the retailer when the association receives them. 46. The retailer is taken to receive volume rebates when the association receives them as the retailer's agent by application of one of the basic tenets of agency law. As Dal Pont explains (see paragraph 19.12, page 488), a payment by a third party to an agent in satisfaction of a contractual obligation effected by that agent on behalf of a disclosed principal will be effective to discharge the third party's liability. It follows that receipt by the agent is equivalent to a receipt by the principal. Assessability to association of volume rebates paid by wholesaler 47. Correspondingly, volume rebates paid under the arrangement are not included in the association's assessable income when they are received by the association as agent for the retailer. There is no derivation by the association at that point in time because the association only receives the rebates as agent for the association, not for its own benefit. Deductibility to retailers of volume rebates 48. The retailers cannot claim a deduction under section 8-1 of the ITAA 1997 for the volume rebates that go to the association because there is no loss or outgoing incurred by the retailer until the association incurs expenditure on the retailer's behalf either for the retailer's own benefit, or for the common benefit of all the retailers, or charges retailers for expenses it has incurred on its own behalf by offsetting those amounts against the retailer's volume rebates. (The reasons for this conclusion are set out in the following paragraphs.) This means that a loss or outgoing would be incurred by the retailer when the association incurs expenditure on the retailer's behalf, but not before. Whether this loss or outgoing is deductible to the retailer under section 8-1 or any other provision of the ITAA 1936 or ITAA 1997 would depend on whether the requirements of the relevant provisions are satisfied. 49. There is little, if any, direct authority on whether or when a taxpayer can claim a deduction for moneys advanced to an agent. As a result the issue must be determined by applying general principles. 50. In AAT Case 9897 (1994) 30 ATR 1030; (1994) 95 ATC 101 Deputy President BJ McMahon said (at paragraph 23): 51. Money held by an agent on a principal's behalf is in the dominion of the principal. It follows that the principal incurs no outgoing until the agent incurs an outgoing on its behalf or the retailer is charged for expenses the association has incurred on its own behalf. 52. This is supported by Hill J's decision in Ogilvy & Mather Pty Ltd v. FC of T 90 ATC 4838 (Ogilvy & Mather). Although Hill J gave the dissenting judgment in this case, the majority based their decision on another issue. 53. In Ogilvy & Mather Hill J considered whether an agent was entitled to claim a deduction for liabilities it incurred on behalf of a principal. In doing so he stated that it was the principal, not the agent, who would be entitled to a deduction if one was otherwise allowable, even if the agent agreed to accept personal liability under the contract, an obligation he likened to a guarantee. His Honour said (at 4857): 54. So, if an agent incurs a liability on a principal's behalf and that liability satisfies the other criterion in section 8-1 of the ITAA 1997 (equivalent to subsection 51(1) of the ITAA 1936), the principal, not the agent, is entitled to a deduction in respect of that liability. The corollary of this is that the principal is not entitled to a deduction before then. 55. Where the association holds the rebates in a common fund, consideration must be given to the consequences, for the issue of deductibility, of the funds being held in that way. This raises the issue of the extent to which the so called 'mutuality principle' is relevant to arrangements of the kind covered by this Ruling. 56. The Full High Court in Sydney Water Board Employees' Credit Union Ltd v. FC of T (1973) 129 CLR 446; 73 ATC 4129 (the Sydney Water case) considered the application of the mutuality principle. Barwick CJ stated: 57. In the same case, Mason J said that an association holding money in a common fund for the benefit of contributors to that fund is a 'convenient agent' for them as a class (see 73 ATC at 4135 and 4136). 58. It follows that, where the rebates are held by the association in a common fund for all the retailers collectively, the reasoning set out in paragraphs 49 to 54 is equally applicable. This is so whether the rebates are received by the association as agent for each retailer individually or as the convenient agent for all of them collectively. Assessability to retailers of excess rebates returned to them 59. Excess rebates are not included in a retailer's assessable income under section 6-5 of the ITAA 1997 at the time they are returned by the association to the retailer because they are not derived by the retailer at that time. As explained above, the rebates were derived by the retailer either when they became due and payable or when they were received by the association. From that time until when the association either incurs expenses on the retailer's behalf, charges the retailer for expenses it has incurred on its own behalf or returns the funds to the retailer, the funds do not leave the retailer's control (see paragraphs 50 to 58). Consequently, by returning excess rebates to the retailers, the association is simply returning to the retailers funds that were theirs all along. Deductibility to association of excess rebates returned to retailers 60. It follows that no deduction is allowable to the association under section 8-1 of the ITAA 1997 upon returning excess rebates to the retailer. As the association holds the volume rebates as agent for the retailers the funds never leave the retailer's control and so cannot be a loss or outgoing of the association. As explained above, the association is simply returning to the retailer funds that were the retailer's all along. The effect of the co-operative provisions (Division 9 of Part III of the ITAA 1936) 61. The co-operative provisions do not affect the tax treatment of the arrangement under the characterisation in paragraph 28(a) even if the retailers are shareholders in the association and the association is a co-operative company for the purposes of section 117 of the ITAA 1936. 62. If the association receives the volume rebates as agent for the retailer, then it does not receive them for the storage, marketing, packing or processing of commodities, or for the rendering of services, or in payment for commodities or animals or land sold. Rather, one of the services provided by the association to the retailers is the collection of volume rebates on their behalf. This means that at the time the rebates are received they do not constitute amounts that should be included in the association's assessable income by virtue of section 119 of the ITAA 1936. 63. The result is the same if the association receives the rebates directly into a common fund. As explained in paragraph 57, an association holding money in a common fund for the benefit of contributors to that fund is a 'convenient agent' for them as a class. Hence, for the same reasons as given in paragraph 62, the rebates are not included in the association's assessable income by virtue of section 119 of the ITAA 1936 at the time they are received by the association. 64. As the volume rebates are not included in the association's assessable income, it follows that the association is not entitled to claim a deduction by virtue of section 120 of the ITAA 1936 for excess volume rebates it returns to its retailers because that section only applies to the assessable income of a co-operative company. 65. It is possible that the association is a co-operative company if amounts it receives for its own benefit are for the storage, marketing, packing or processing of commodities, for the rendering of services, or in payment of commodities or animals or land sold. If that is the case such amounts may be included in the association's assessable income under section 119 of the ITAA 1936 when the association offsets such amounts against funds it holds on behalf of the retailers. | Retailer entitled to volume rebate but redirects it to association (characterisation in paragraph 28(b)): 66. Under this characterisation: 67. This characterisation can be diagrammatically represented as follows: | Taxation consequences of characterisation in paragraph 28(b): Assessability to retailers of volume rebates paid by wholesaler 68. The assessability to the retailers of the volume rebates paid by the wholesaler is as set out in paragraph 45. Even though the association does not receive the rebates as agent of the retailers under the characterisation in paragraph 28(b), subsection 6-5(4) of the ITAA 1997 deems the retailer to have received, and hence to have derived, the volume rebates when they are applied or dealt with in any way on the retailer's behalf or as the retailer directs. Deductibility to retailers of redirected volume rebates 69. The mere redirection of the volume rebates by the retailer to the association is either not a loss or outgoing incurred in the course of carrying on the retailer's business or is a loss or outgoing of capital or of a capital nature. Therefore, it would not be deductible to the retailer under section 8-1 of the ITAA 1997. 70. Both of these views are supported on the basis that the redirection is not a working expense of the retailer's business because it does not create or acquire things (for example goods or services) that will be consumed for the purposes of that business. Rather, it is an amount paid for the purpose of receiving a corresponding amount back at a later time (and, it would appear, in the hope of obtaining a tax deduction). 71. Although the in toto redirection of the volume rebates to the association is not a deduction per se, a deduction may be available to a retailer for some part of the redirected rebates when that part is subsequently outlaid. Whether this is so depends on all the facts and circumstances including what the loss or outgoing is for and the application of any relevant provision of the ITAA 1936 or the ITAA 1997. Subject to that qualification, some examples might be: 72. Certainly, however, the redirected volume rebates would not be a deductible loss or outgoing to the extent that they are returned, or available for return, to the retailer (for the reasons set out in paragraph 70). 73. Further, to the extent the loss or outgoing is made to build up a reserve fund for future expenses (as explained in paragraph 7(vii)), it is a loss or outgoing of capital or of a capital nature. Building up that fund, whether it is used to build up the assets of the association, or to return excess amounts to the retailers, is of a capital character. The funds form a capital pool that provides an enduring benefit to the retailers, and contributions to it are therefore not deductible under section 8-1 of the ITAA 1997. Assessability to association of volume rebates redirected by retailer 74. It has been claimed that the redirected volume rebates are not assessable income to the association on the basis that they are 'contributions' made by the retailers of a common fund and hence subject to the mutuality principle. However, this is not a true characterisation of the transaction because there is no correlation between the amount of the 'contributions' and the expenditure of the association. 75. In the Sydney Water case the question was whether the amount of interest received by the taxpayer on loans made to its borrowing members constituted income in the taxpayer's hands within the meaning of the ITAA 1936. It did. The taxpayer described the borrowing members as 'contributors', arguing that their interest payments should not be characterised as assessable income due to the application of the 'mutuality principle'. The High Court rejected the taxpayer's argument that the mutuality principle applied, holding that the interest was assessable income of the taxpayer. The fact that a borrower's interest payments were in no sense a pre-estimate of the amount required to meet his proportion of the mutual liabilities incurred on behalf of the borrowers was one of the factors taken into account by Mason J (at ATC 4136), with whom Menzies, Walsh and Stephen JJ agreed, in concluding that the circumstances did not come within the mutuality principle. 76. Similarly, in the type of arrangement dealt with in this Ruling, a retailer's redirected volume rebates are not a pre-estimate of the amount required to meet that retailer's proportion of the mutual liabilities the association incurs on behalf of all the retailers. As they are gains regularly derived by the association in the course of carrying on its business they would be included in the association's assessable income under section 6-5 of the ITAA 1997. Assessability to retailers of excess rebates returned to them 77. Section 6-5 of the ITAA 1997 would apply to include any excess rebates returned to the retailer by the association in the retailer's assessable income as ordinary income. 78. The returns are gains regularly derived by the retailer in the course of carrying on its business (see Parson's principles of periodicity and business gains in RW Parsons, Income Taxation in Australia (1985), paragraphs 2.179 and 2.83)). It is clear that obtaining the excess rebates is as much an activity of the retailer's business as obtaining the volume rebates in the first place (see HR Sinclair & Son Pty Ltd v. FC of T (1966) 114 CLR 537). This view is not based on any attempt to contend that the return of the rebates is the recoupment of a deduction; it is based on the character of the return of the excess rebates itself. The effect of the co-operative provisions (Division 9 of Part III of the ITAA 1936) 79. The co-operative provisions may have some effect on the tax treatment of the association under the characterisation in paragraph 28(b) if the retailers are shareholders in the association and the association is a co-operative company for the purposes of section 117 of the ITAA 1936. 80. To the extent the volume rebates are included in the association's assessable income, the association may be entitled to claim a deduction by virtue of section 120 of the ITAA 1936 for excess volume rebates it returns to its retailer shareholders, where the rebates are allocated on the basis of the retailer's business with the association or are paid as interest or dividends on shares. | Association entitled to volume rebate (characterisation in paragraph 28(c)): 81. Under this characterisation: 82. This characterisation can be diagrammatically represented as follows: | Reasons for characterisation in paragraph 28(c): 83. If the retailer is not beneficially entitled to receive volume rebates in its own right, then it is impossible for the association to either collect those rebates 'on the retailer's behalf' or for the retailer to 'direct' payment of the rebates to the association. The association must therefore receive the rebates in its own right as part of its own business profits. | Taxation consequences of characterisation in paragraph 28(c): Assessability to association of volume rebates paid by wholesaler 84. If the association receives the rebates in its own right as part of its own business profits then it will be included in the association's assessable income as ordinary business income under section 6-5 of the ITAA 1997. Assessability to retailers of excess rebates paid to them 85. If the retailer is a shareholder in the association and the payment of the excess rebates is a distribution of the association's profits, section 44 of the ITAA 1936 applies to include the amount in the retailer's assessable income on the basis that it is a dividend paid out of profits. Otherwise, it would be assessable to the retailer as ordinary income for the same reasons as set out in paragraph 78. 86. If the payment of excess rebates to retailers is a dividend no deduction is allowable to the association under section 8-1 of the ITAA 1997. However, if that is not the case, a deduction would be allowable under section 8-1 of the ITAA 1997 to the association for the payment of excess rebates to retailers. This is because the payment is an outgoing incurred by the association in the course of carrying on its business for the purpose of producing assessable income, being the rebates received from the wholesaler. The effect of the co-operative provisions (Division 9 of Part III of the ITAA 1936) on the redirected volume rebates 87. The association would not be a co-operative for the purposes of section 117 of the ITAA 1936 because one of the businesses in which it is engaged has as its primary object the making of profits from volume rebates. (See paragraph 8 of TR 1999/14: Determining the co-operative status of a company.) | The general anti-avoidance provision (Part IVA of the ITAA 1936): 88. If, contrary to this Ruling, the retailer is entitled to a deduction for the volume rebates that go to the association, the Commissioner would consider the application of Part IVA to the arrangement in appropriate cases. These cases would likely be those where the scheme gives rise to a tax benefit in the form of a tax deduction with no matching assessable income (see paragraph 5). The Commissioner would need to have regard to the factors in section 177D of the ITAA 1936 to determine if the dominant purpose of the scheme was to obtain the tax benefit. 89. An alternative view of the taxation consequences under the characterisation in paragraph 28(b) (see paragraph 66) is that explained in paragraphs 4 and 5 of this Ruling. However, for all the reasons set out in paragraphs 68 to 78, the Commissioner does not accept that this alternative view is correct. 90. Below is a detailed contents list for this draft Taxation Ruling: Commissioner of Taxation 9 June 2004 Previously released as TR 2003/D13.

Ruling: 9. The Ruling below is divided into three sections to deal with the three possible ways in which the arrangement can be characterised depending on the facts. | (a) Retailer entitled to volume rebate but association receives it as agent: 10. The consequences set out in paragraphs 11 to 16 follow if, as set out in paragraph 32, the retailer is entitled to the volume rebate but the association receives it as agent for the individual retailer entitled to receive it, or as a convenient agent for all of the retailers collectively. | Entitlement of retailer to volume rebate: 11. The volume rebate is, under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), assessable income of the retailer in the income year in which it becomes due and payable (or, if the retailer is on a cash basis of accounting, when it is received). | Receipt of volume rebate by association: 12. Correspondingly, the volume rebate is not included in the association's assessable income under section 6-5 of the ITAA 1997. 13. The retailer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the volume rebate that goes to the association. | Expenditure incurred by association on behalf of retailers: 14. A loss or outgoing would be incurred by the retailer when the association incurs expenditure on the retailer's behalf. Whether this loss or outgoing is deductible to the retailer under section 8-1 or any other provision of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997 would depend on whether the requirements of the relevant provisions are satisfied. | Return of excess rebates to a retailer: 15. Excess rebates returned to the retailer by the association, or becoming available for return, are not included in the retailer's assessable income under section 6-5 of the ITAA 1997. 16. No deduction is allowable to the association under section 8-1 of the ITAA 1997 when it returns excess rebates to a retailer. | (b) Retailer entitled to volume rebate but redirects it to association: 17. The consequences set out in paragraphs 18 to 22 follow if, as set out in paragraph 66, the retailer is entitled to the volume rebate but redirects it to the association so that the association does not receive it as agent for the retailers either individually or collectively. In this situation the volume rebate is called a 'redirected' volume rebate. | Entitlement of retailer to volume rebate: 18. The redirected volume rebate is, under section 6-5 of the ITAA 1997, assessable income of the retailer in the income year in which it becomes due and payable (or, if the retailer is on a cash basis of accounting, when it is received). | Redirection of volume rebate to association: 19. The retailer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the mere redirection of the volume rebate when it goes to the association. Although the in toto redirection of the volume rebates to the association is not a deduction per se, a deduction may be available to a retailer for some part of the redirected rebates when that part is subsequently outlaid. Whether this is so depends on all the facts and circumstances including what the loss or outgoing is for and the application of any relevant provision of the ITAA 1936 or the ITAA 1997. Certainly, the redirected volume rebates would not be a deductible loss or outgoing to the extent that they are returned, or available for return, to the retailer. 20. The redirected volume rebate is, under section 6-5 of the ITAA 1997, assessable income of the association in the income year in which the redirection occurs. | Return of excess rebates to a retailer: 21. Excess rebates returned to the retailer by the association, or becoming available for return, are included in the retailer's assessable income under section 6-5 of the ITAA 1997. 22. No deduction is allowable to the association under section 8-1 of the ITAA 1997 when it returns excess rebates to a retailer but section 120 of the ITAA 1936 may allow a deduction if the association is a co-operative company under section 117. | (c) Association entitled to volume rebate: 23. The consequences set out in paragraphs 24 to 27 follow if, as set out in paragraph 81, the association rather than the retailer is entitled to the volume rebate from the wholesaler. | Entitlement of association to volume rebate: 24. Section 6-5 of the ITAA 1997 applies to include in the association's assessable income the volume rebate to which it is entitled. | Payment of excess rebates to a retailer: 25. If the retailer is a shareholder in the association and the payment of the excess rebates is a distribution of the association's profits, section 44 of the ITAA 1936 applies to include the amount in the retailer's assessable income on the basis that it is a dividend paid out of profits. No deduction would be available to the association for the return of the excess rebates in these circumstances. 26. However, if this is not the case, section 6-5 of the ITAA 1997 applies to include any excess rebate paid to the retailer by the association in the retailer's assessable income when the retailer derives it. This will be when the excess rebates become due and payable (or, if the retailer is on a cash basis of accounting, when the excess rebate is received). In these circumstances, a deduction would be allowable under section 8-1 of the ITAA 1997 to the association for the payment of excess rebates to retailers. | The association is not a co-operative company: 27. The association is not a co-operative company under section 117 of the ITAA 1936. | Possible legal characterisations of the arrangement: 28. The explanation below is divided into three main sections to deal with the three possible ways in which the arrangement can be legally characterised. Those ways are that: 29. How the arrangement is characterised will depend on the intentions of the relevant parties as reflected, among other things, in the association's constituent documents and agreements between the retailers, the association and the wholesaler. In each case, the physical cash flows are the same but their legal character is different. 30. It is the Commissioner's view that the characterisation in paragraph 28(a) reflected the true legal nature of the actual arrangements of this kind. The characterisation in paragraph 28(b) was contended by certain parties to those arrangements, but it was not found in the cases examined. The Commissioner does not believe that the consequences of the characterisation in paragraph 28(b) as set out in this Ruling would be likely to arise. The examination of actual arrangements suggests that features which would take arrangements from the characterisation in paragraph 28(a) to the characterisation in paragraph 28(b) require explicit decisions and actions which are practically very onerous and improbable for retailers to take. However, this Ruling deals with the consequences of the characterisation in paragraph 28(b) in case it does apply. 31. Paragraph 7(viii) referred to the possible interposition of an umbrella body between the wholesaler and the association. This would make no difference to the characterisation or the tax consequences of the arrangements covered by this Ruling because the umbrella body, in substance, plays a similar role to the wholesaler. | Retailer entitled to volume rebate but association receives it as agent (characterisation in paragraph 28(a)): 32. Under this characterisation: 33. This characterisation can be diagrammatically represented as follows: | Reasons for characterisation in paragraph 28(a): Basis upon which the association receives volume rebates (paragraph 32(i)) 34. Whether the legal nature of the arrangement falls under the characterisation in paragraph 28(a) depends on whether an agency relationship can be shown to exist in relation to the collection of the volume rebates. 35. Butterworths Australian Legal Dictionary (1997) defines 'agency' as follows: 36. Hence, there is an agency relationship between the association and the retailer as to the collection of volume rebates if the association is authorised by the retailer to collect the volume rebates on its behalf. This authority may be conferred expressly or impliedly. (On implied agency, see definition of agency quoted above. For those interested in a fuller explanation of implied agency, see GE Dal Pont, Law of Agency, Butterworths, 2001, pages 93-96.) 37. Examples of factors supporting the conclusion that there is at least an implied agency relationship between the retailer and the association in relation to the collection of volume rebates would include the following: 38. It should be noted that this is not an exhaustive list. Hence, there may be other factors not listed here that support the conclusion that there is either an express or implied agency relationship regarding the receipt of volume rebates. Also, even though one or more of the above factors is not present does not mean that such a relationship does not exist. 39. Where the rebates are received on behalf of the retailers but the facts do not support the conclusion that the association collects the volume rebates as agent for each retailer individually, then it will follow that the association must receive them directly into a common fund for the common benefit of all the retailers as the convenient agent of all of them collectively. Basis upon which the association holds volume rebates (paragraph 32(ii)) 40. In the typical type of arrangement dealt with by this Ruling, the rebates to which an individual retailer is entitled are regularly returned to that retailer after deducting expenses incurred either on that particular retailer's behalf or for the common benefit of all retailers. This supports the conclusion that the rebates are held on the individual retailer's behalf. 41. There is no inconsistency between the association holding money on behalf of an individual retailer and being authorised to spend it either for the benefit of the individual retailer or for the common benefit of all retailers. 42. Also, that each retailer's funds are not generally held in a separate account is not inconsistent with the association holding them as agent for the particular retailer. This simply means that the association's relationship in respect of those funds is debtor, not trustee. Dal Pont, at page 320, describes this difference, relevantly, as follows: 43. If the facts do not support the conclusion that the association holds the funds from the rebates for each retailer individually, then they would normally support the conclusion that the association holds the funds from the receipt of the rebates in a common fund for the common benefit of all the retailers. This would usually be evident from the purpose for which the funds are held which could be inferred from the uses to which the funds are put and how the retailers benefit from the fund. Basis upon which the association uses the funds (paragraph 32(iii)) 44. That the association has authority to spend each retailer's funds either for the individual retailer's benefit or for the common benefit of all retailers is typically apparent from the formula used in the association's agreement with the retailers to calculate how much surplus each retailer is entitled to. | Taxation consequences of characterisation in paragraph 28(a): Assessability to retailers of volume rebates paid by wholesaler 45. Section 6-5 of the ITAA 1997 includes ordinary income in a taxpayer's assessable income when it is derived by the taxpayer. The volume rebates would be derived by the retailer in the income year in which they become due and payable or, if the retailer is on a cash basis of accounting, they would be derived by the retailer when the association receives them. 46. The retailer is taken to receive volume rebates when the association receives them as the retailer's agent by application of one of the basic tenets of agency law. As Dal Pont explains (see paragraph 19.12, page 488), a payment by a third party to an agent in satisfaction of a contractual obligation effected by that agent on behalf of a disclosed principal will be effective to discharge the third party's liability. It follows that receipt by the agent is equivalent to a receipt by the principal. Assessability to association of volume rebates paid by wholesaler 47. Correspondingly, volume rebates paid under the arrangement are not included in the association's assessable income when they are received by the association as agent for the retailer. There is no derivation by the association at that point in time because the association only receives the rebates as agent for the association, not for its own benefit. Deductibility to retailers of volume rebates 48. The retailers cannot claim a deduction under section 8-1 of the ITAA 1997 for the volume rebates that go to the association because there is no loss or outgoing incurred by the retailer until the association incurs expenditure on the retailer's behalf either for the retailer's own benefit, or for the common benefit of all the retailers, or charges retailers for expenses it has incurred on its own behalf by offsetting those amounts against the retailer's volume rebates. (The reasons for this conclusion are set out in the following paragraphs.) This means that a loss or outgoing would be incurred by the retailer when the association incurs expenditure on the retailer's behalf, but not before. Whether this loss or outgoing is deductible to the retailer under section 8-1 or any other provision of the ITAA 1936 or ITAA 1997 would depend on whether the requirements of the relevant provisions are satisfied. 49. There is little, if any, direct authority on whether or when a taxpayer can claim a deduction for moneys advanced to an agent. As a result the issue must be determined by applying general principles. 50. In AAT Case 9897 (1994) 30 ATR 1030; (1994) 95 ATC 101 Deputy President BJ McMahon said (at paragraph 23): 51. Money held by an agent on a principal's behalf is in the dominion of the principal. It follows that the principal incurs no outgoing until the agent incurs an outgoing on its behalf or the retailer is charged for expenses the association has incurred on its own behalf. 52. This is supported by Hill J's decision in Ogilvy & Mather Pty Ltd v. FC of T 90 ATC 4838 (Ogilvy & Mather). Although Hill J gave the dissenting judgment in this case, the majority based their decision on another issue. 53. In Ogilvy & Mather Hill J considered whether an agent was entitled to claim a deduction for liabilities it incurred on behalf of a principal. In doing so he stated that it was the principal, not the agent, who would be entitled to a deduction if one was otherwise allowable, even if the agent agreed to accept personal liability under the contract, an obligation he likened to a guarantee. His Honour said (at 4857): 54. So, if an agent incurs a liability on a principal's behalf and that liability satisfies the other criterion in section 8-1 of the ITAA 1997 (equivalent to subsection 51(1) of the ITAA 1936), the principal, not the agent, is entitled to a deduction in respect of that liability. The corollary of this is that the principal is not entitled to a deduction before then. 55. Where the association holds the rebates in a common fund, consideration must be given to the consequences, for the issue of deductibility, of the funds being held in that way. This raises the issue of the extent to which the so called 'mutuality principle' is relevant to arrangements of the kind covered by this Ruling. 56. The Full High Court in Sydney Water Board Employees' Credit Union Ltd v. FC of T (1973) 129 CLR 446; 73 ATC 4129 (the Sydney Water case) considered the application of the mutuality principle. Barwick CJ stated: 57. In the same case, Mason J said that an association holding money in a common fund for the benefit of contributors to that fund is a 'convenient agent' for them as a class (see 73 ATC at 4135 and 4136). 58. It follows that, where the rebates are held by the association in a common fund for all the retailers collectively, the reasoning set out in paragraphs 49 to 54 is equally applicable. This is so whether the rebates are received by the association as agent for each retailer individually or as the convenient agent for all of them collectively. Assessability to retailers of excess rebates returned to them 59. Excess rebates are not included in a retailer's assessable income under section 6-5 of the ITAA 1997 at the time they are returned by the association to the retailer because they are not derived by the retailer at that time. As explained above, the rebates were derived by the retailer either when they became due and payable or when they were received by the association. From that time until when the association either incurs expenses on the retailer's behalf, charges the retailer for expenses it has incurred on its own behalf or returns the funds to the retailer, the funds do not leave the retailer's control (see paragraphs 50 to 58). Consequently, by returning excess rebates to the retailers, the association is simply returning to the retailers funds that were theirs all along. Deductibility to association of excess rebates returned to retailers 60. It follows that no deduction is allowable to the association under section 8-1 of the ITAA 1997 upon returning excess rebates to the retailer. As the association holds the volume rebates as agent for the retailers the funds never leave the retailer's control and so cannot be a loss or outgoing of the association. As explained above, the association is simply returning to the retailer funds that were the retailer's all along. The effect of the co-operative provisions (Division 9 of Part III of the ITAA 1936) 61. The co-operative provisions do not affect the tax treatment of the arrangement under the characterisation in paragraph 28(a) even if the retailers are shareholders in the association and the association is a co-operative company for the purposes of section 117 of the ITAA 1936. 62. If the association receives the volume rebates as agent for the retailer, then it does not receive them for the storage, marketing, packing or processing of commodities, or for the rendering of services, or in payment for commodities or animals or land sold. Rather, one of the services provided by the association to the retailers is the collection of volume rebates on their behalf. This means that at the time the rebates are received they do not constitute amounts that should be included in the association's assessable income by virtue of section 119 of the ITAA 1936. 63. The result is the same if the association receives the rebates directly into a common fund. As explained in paragraph 57, an association holding money in a common fund for the benefit of contributors to that fund is a 'convenient agent' for them as a class. Hence, for the same reasons as given in paragraph 62, the rebates are not included in the association's assessable income by virtue of section 119 of the ITAA 1936 at the time they are received by the association. 64. As the volume rebates are not included in the association's assessable income, it follows that the association is not entitled to claim a deduction by virtue of section 120 of the ITAA 1936 for excess volume rebates it returns to its retailers because that section only applies to the assessable income of a co-operative company. 65. It is possible that the association is a co-operative company if amounts it receives for its own benefit are for the storage, marketing, packing or processing of commodities, for the rendering of services, or in payment of commodities or animals or land sold. If that is the case such amounts may be included in the association's assessable income under section 119 of the ITAA 1936 when the association offsets such amounts against funds it holds on behalf of the retailers. | Retailer entitled to volume rebate but redirects it to association (characterisation in paragraph 28(b)): 66. Under this characterisation: 67. This characterisation can be diagrammatically represented as follows: | Taxation consequences of characterisation in paragraph 28(b): Assessability to retailers of volume rebates paid by wholesaler 68. The assessability to the retailers of the volume rebates paid by the wholesaler is as set out in paragraph 45. Even though the association does not receive the rebates as agent of the retailers under the characterisation in paragraph 28(b), subsection 6-5(4) of the ITAA 1997 deems the retailer to have received, and hence to have derived, the volume rebates when they are applied or dealt with in any way on the retailer's behalf or as the retailer directs. Deductibility to retailers of redirected volume rebates 69. The mere redirection of the volume rebates by the retailer to the association is either not a loss or outgoing incurred in the course of carrying on the retailer's business or is a loss or outgoing of capital or of a capital nature. Therefore, it would not be deductible to the retailer under section 8-1 of the ITAA 1997. 70. Both of these views are supported on the basis that the redirection is not a working expense of the retailer's business because it does not create or acquire things (for example goods or services) that will be consumed for the purposes of that business. Rather, it is an amount paid for the purpose of receiving a corresponding amount back at a later time (and, it would appear, in the hope of obtaining a tax deduction). 71. Although the in toto redirection of the volume rebates to the association is not a deduction per se, a deduction may be available to a retailer for some part of the redirected rebates when that part is subsequently outlaid. Whether this is so depends on all the facts and circumstances including what the loss or outgoing is for and the application of any relevant provision of the ITAA 1936 or the ITAA 1997. Subject to that qualification, some examples might be: 72. Certainly, however, the redirected volume rebates would not be a deductible loss or outgoing to the extent that they are returned, or available for return, to the retailer (for the reasons set out in paragraph 70). 73. Further, to the extent the loss or outgoing is made to build up a reserve fund for future expenses (as explained in paragraph 7(vii)), it is a loss or outgoing of capital or of a capital nature. Building up that fund, whether it is used to build up the assets of the association, or to return excess amounts to the retailers, is of a capital character. The funds form a capital pool that provides an enduring benefit to the retailers, and contributions to it are therefore not deductible under section 8-1 of the ITAA 1997. Assessability to association of volume rebates redirected by retailer 74. It has been claimed that the redirected volume rebates are not assessable income to the association on the basis that they are 'contributions' made by the retailers of a common fund and hence subject to the mutuality principle. However, this is not a true characterisation of the transaction because there is no correlation between the amount of the 'contributions' and the expenditure of the association. 75. In the Sydney Water case the question was whether the amount of interest received by the taxpayer on loans made to its borrowing members constituted income in the taxpayer's hands within the meaning of the ITAA 1936. It did. The taxpayer described the borrowing members as 'contributors', arguing that their interest payments should not be characterised as assessable income due to the application of the 'mutuality principle'. The High Court rejected the taxpayer's argument that the mutuality principle applied, holding that the interest was assessable income of the taxpayer. The fact that a borrower's interest payments were in no sense a pre-estimate of the amount required to meet his proportion of the mutual liabilities incurred on behalf of the borrowers was one of the factors taken into account by Mason J (at ATC 4136), with whom Menzies, Walsh and Stephen JJ agreed, in concluding that the circumstances did not come within the mutuality principle. 76. Similarly, in the type of arrangement dealt with in this Ruling, a retailer's redirected volume rebates are not a pre-estimate of the amount required to meet that retailer's proportion of the mutual liabilities the association incurs on behalf of all the retailers. As they are gains regularly derived by the association in the course of carrying on its business they would be included in the association's assessable income under section 6-5 of the ITAA 1997. Assessability to retailers of excess rebates returned to them 77. Section 6-5 of the ITAA 1997 would apply to include any excess rebates returned to the retailer by the association in the retailer's assessable income as ordinary income. 78. The returns are gains regularly derived by the retailer in the course of carrying on its business (see Parson's principles of periodicity and business gains in RW Parsons, Income Taxation in Australia (1985), paragraphs 2.179 and 2.83)). It is clear that obtaining the excess rebates is as much an activity of the retailer's business as obtaining the volume rebates in the first place (see HR Sinclair & Son Pty Ltd v. FC of T (1966) 114 CLR 537). This view is not based on any attempt to contend that the return of the rebates is the recoupment of a deduction; it is based on the character of the return of the excess rebates itself. The effect of the co-operative provisions (Division 9 of Part III of the ITAA 1936) 79. The co-operative provisions may have some effect on the tax treatment of the association under the characterisation in paragraph 28(b) if the retailers are shareholders in the association and the association is a co-operative company for the purposes of section 117 of the ITAA 1936. 80. To the extent the volume rebates are included in the association's assessable income, the association may be entitled to claim a deduction by virtue of section 120 of the ITAA 1936 for excess volume rebates it returns to its retailer shareholders, where the rebates are allocated on the basis of the retailer's business with the association or are paid as interest or dividends on shares. | Association entitled to volume rebate (characterisation in paragraph 28(c)): 81. Under this characterisation: 82. This characterisation can be diagrammatically represented as follows: | Reasons for characterisation in paragraph 28(c): 83. If the retailer is not beneficially entitled to receive volume rebates in its own right, then it is impossible for the association to either collect those rebates 'on the retailer's behalf' or for the retailer to 'direct' payment of the rebates to the association. The association must therefore receive the rebates in its own right as part of its own business profits. | Taxation consequences of characterisation in paragraph 28(c): Assessability to association of volume rebates paid by wholesaler 84. If the association receives the rebates in its own right as part of its own business profits then it will be included in the association's assessable income as ordinary business income under section 6-5 of the ITAA 1997. Assessability to retailers of excess rebates paid to them 85. If the retailer is a shareholder in the association and the payment of the excess rebates is a distribution of the association's profits, section 44 of the ITAA 1936 applies to include the amount in the retailer's assessable income on the basis that it is a dividend paid out of profits. Otherwise, it would be assessable to the retailer as ordinary income for the same reasons as set out in paragraph 78. 86. If the payment of excess rebates to retailers is a dividend no deduction is allowable to the association under section 8-1 of the ITAA 1997. However, if that is not the case, a deduction would be allowable under section 8-1 of the ITAA 1997 to the association for the payment of excess rebates to retailers. This is because the payment is an outgoing incurred by the association in the course of carrying on its business for the purpose of producing assessable income, being the rebates received from the wholesaler. The effect of the co-operative provisions (Division 9 of Part III of the ITAA 1936) on the redirected volume rebates 87. The association would not be a co-operative for the purposes of section 117 of the ITAA 1936 because one of the businesses in which it is engaged has as its primary object the making of profits from volume rebates. (See paragraph 8 of TR 1999/14: Determining the co-operative status of a company.) | The general anti-avoidance provision (Part IVA of the ITAA 1936): 88. If, contrary to this Ruling, the retailer is entitled to a deduction for the volume rebates that go to the association, the Commissioner would consider the application of Part IVA to the arrangement in appropriate cases. These cases would likely be those where the scheme gives rise to a tax benefit in the form of a tax deduction with no matching assessable income (see paragraph 5). The Commissioner would need to have regard to the factors in section 177D of the ITAA 1936 to determine if the dominant purpose of the scheme was to obtain the tax benefit. 89. An alternative view of the taxation consequences under the characterisation in paragraph 28(b) (see paragraph 66) is that explained in paragraphs 4 and 5 of this Ruling. However, for all the reasons set out in paragraphs 68 to 78, the Commissioner does not accept that this alternative view is correct. 90. Below is a detailed contents list for this draft Taxation Ruling: Commissioner of Taxation 9 June 2004 Previously released as TR 2003/D13.


Appendix: Possible legal characterisations of the arrangement: 28. The explanation below is divided into three main sections to deal with the three possible ways in which the arrangement can be legally characterised. Those ways are that: 29. How the arrangement is characterised will depend on the intentions of the relevant parties as reflected, among other things, in the association's constituent documents and agreements between the retailers, the association and the wholesaler. In each case, the physical cash flows are the same but their legal character is different. 30. It is the Commissioner's view that the characterisation in paragraph 28(a) reflected the true legal nature of the actual arrangements of this kind. The characterisation in paragraph 28(b) was contended by certain parties to those arrangements, but it was not found in the cases examined. The Commissioner does not believe that the consequences of the characterisation in paragraph 28(b) as set out in this Ruling would be likely to arise. The examination of actual arrangements suggests that features which would take arrangements from the characterisation in paragraph 28(a) to the characterisation in paragraph 28(b) require explicit decisions and actions which are practically very onerous and improbable for retailers to take. However, this Ruling deals with the consequences of the characterisation in paragraph 28(b) in case it does apply. 31. Paragraph 7(viii) referred to the possible interposition of an umbrella body between the wholesaler and the association. This would make no difference to the characterisation or the tax consequences of the arrangements covered by this Ruling because the umbrella body, in substance, plays a similar role to the wholesaler. | Retailer entitled to volume rebate but association receives it as agent (characterisation in paragraph 28(a)): 32. Under this characterisation: 33. This characterisation can be diagrammatically represented as follows: | Reasons for characterisation in paragraph 28(a): Basis upon which the association receives volume rebates (paragraph 32(i)) 34. Whether the legal nature of the arrangement falls under the characterisation in paragraph 28(a) depends on whether an agency relationship can be shown to exist in relation to the collection of the volume rebates. 35. Butterworths Australian Legal Dictionary (1997) defines 'agency' as follows: 36. Hence, there is an agency relationship between the association and the retailer as to the collection of volume rebates if the association is authorised by the retailer to collect the volume rebates on its behalf. This authority may be conferred expressly or impliedly. (On implied agency, see definition of agency quoted above. For those interested in a fuller explanation of implied agency, see GE Dal Pont, Law of Agency, Butterworths, 2001, pages 93-96.) 37. Examples of factors supporting the conclusion that there is at least an implied agency relationship between the retailer and the association in relation to the collection of volume rebates would include the following: 38. It should be noted that this is not an exhaustive list. Hence, there may be other factors not listed here that support the conclusion that there is either an express or implied agency relationship regarding the receipt of volume rebates. Also, even though one or more of the above factors is not present does not mean that such a relationship does not exist. 39. Where the rebates are received on behalf of the retailers but the facts do not support the conclusion that the association collects the volume rebates as agent for each retailer individually, then it will follow that the association must receive them directly into a common fund for the common benefit of all the retailers as the convenient agent of all of them collectively. Basis upon which the association holds volume rebates (paragraph 32(ii)) 40. In the typical type of arrangement dealt with by this Ruling, the rebates to which an individual retailer is entitled are regularly returned to that retailer after deducting expenses incurred either on that particular retailer's behalf or for the common benefit of all retailers. This supports the conclusion that the rebates are held on the individual retailer's behalf. 41. There is no inconsistency between the association holding money on behalf of an individual retailer and being authorised to spend it either for the benefit of the individual retailer or for the common benefit of all retailers. 42. Also, that each retailer's funds are not generally held in a separate account is not inconsistent with the association holding them as agent for the particular retailer. This simply means that the association's relationship in respect of those funds is debtor, not trustee. Dal Pont, at page 320, describes this difference, relevantly, as follows: 43. If the facts do not support the conclusion that the association holds the funds from the rebates for each retailer individually, then they would normally support the conclusion that the association holds the funds from the receipt of the rebates in a common fund for the common benefit of all the retailers. This would usually be evident from the purpose for which the funds are held which could be inferred from the uses to which the funds are put and how the retailers benefit from the fund. Basis upon which the association uses the funds (paragraph 32(iii)) 44. That the association has authority to spend each retailer's funds either for the individual retailer's benefit or for the common benefit of all retailers is typically apparent from the formula used in the association's agreement with the retailers to calculate how much surplus each retailer is entitled to. | Taxation consequences of characterisation in paragraph 28(a): Assessability to retailers of volume rebates paid by wholesaler 45. Section 6-5 of the ITAA 1997 includes ordinary income in a taxpayer's assessable income when it is derived by the taxpayer. The volume rebates would be derived by the retailer in the income year in which they become due and payable or, if the retailer is on a cash basis of accounting, they would be derived by the retailer when the association receives them. 46. The retailer is taken to receive volume rebates when the association receives them as the retailer's agent by application of one of the basic tenets of agency law. As Dal Pont explains (see paragraph 19.12, page 488), a payment by a third party to an agent in satisfaction of a contractual obligation effected by that agent on behalf of a disclosed principal will be effective to discharge the third party's liability. It follows that receipt by the agent is equivalent to a receipt by the principal. Assessability to association of volume rebates paid by wholesaler 47. Correspondingly, volume rebates paid under the arrangement are not included in the association's assessable income when they are received by the association as agent for the retailer. There is no derivation by the association at that point in time because the association only receives the rebates as agent for the association, not for its own benefit. Deductibility to retailers of volume rebates 48. The retailers cannot claim a deduction under section 8-1 of the ITAA 1997 for the volume rebates that go to the association because there is no loss or outgoing incurred by the retailer until the association incurs expenditure on the retailer's behalf either for the retailer's own benefit, or for the common benefit of all the retailers, or charges retailers for expenses it has incurred on its own behalf by offsetting those amounts against the retailer's volume rebates. (The reasons for this conclusion are set out in the following paragraphs.) This means that a loss or outgoing would be incurred by the retailer when the association incurs expenditure on the retailer's behalf, but not before. Whether this loss or outgoing is deductible to the retailer under section 8-1 or any other provision of the ITAA 1936 or ITAA 1997 would depend on whether the requirements of the relevant provisions are satisfied. 49. There is little, if any, direct authority on whether or when a taxpayer can claim a deduction for moneys advanced to an agent. As a result the issue must be determined by applying general principles. 50. In AAT Case 9897 (1994) 30 ATR 1030; (1994) 95 ATC 101 Deputy President BJ McMahon said (at paragraph 23): 51. Money held by an agent on a principal's behalf is in the dominion of the principal. It follows that the principal incurs no outgoing until the agent incurs an outgoing on its behalf or the retailer is charged for expenses the association has incurred on its own behalf. 52. This is supported by Hill J's decision in Ogilvy & Mather Pty Ltd v. FC of T 90 ATC 4838 (Ogilvy & Mather). Although Hill J gave the dissenting judgment in this case, the majority based their decision on another issue. 53. In Ogilvy & Mather Hill J considered whether an agent was entitled to claim a deduction for liabilities it incurred on behalf of a principal. In doing so he stated that it was the principal, not the agent, who would be entitled to a deduction if one was otherwise allowable, even if the agent agreed to accept personal liability under the contract, an obligation he likened to a guarantee. His Honour said (at 4857): 54. So, if an agent incurs a liability on a principal's behalf and that liability satisfies the other criterion in section 8-1 of the ITAA 1997 (equivalent to subsection 51(1) of the ITAA 1936), the principal, not the agent, is entitled to a deduction in respect of that liability. The corollary of this is that the principal is not entitled to a deduction before then. 55. Where the association holds the rebates in a common fund, consideration must be given to the consequences, for the issue of deductibility, of the funds being held in that way. This raises the issue of the extent to which the so called 'mutuality principle' is relevant to arrangements of the kind covered by this Ruling. 56. The Full High Court in Sydney Water Board Employees' Credit Union Ltd v. FC of T (1973) 129 CLR 446; 73 ATC 4129 (the Sydney Water case) considered the application of the mutuality principle. Barwick CJ stated: 57. In the same case, Mason J said that an association holding money in a common fund for the benefit of contributors to that fund is a 'convenient agent' for them as a class (see 73 ATC at 4135 and 4136). 58. It follows that, where the rebates are held by the association in a common fund for all the retailers collectively, the reasoning set out in paragraphs 49 to 54 is equally applicable. This is so whether the rebates are received by the association as agent for each retailer individually or as the convenient agent for all of them collectively. Assessability to retailers of excess rebates returned to them 59. Excess rebates are not included in a retailer's assessable income under section 6-5 of the ITAA 1997 at the time they are returned by the association to the retailer because they are not derived by the retailer at that time. As explained above, the rebates were derived by the retailer either when they became due and payable or when they were received by the association. From that time until when the association either incurs expenses on the retailer's behalf, charges the retailer for expenses it has incurred on its own behalf or returns the funds to the retailer, the funds do not leave the retailer's control (see paragraphs 50 to 58). Consequently, by returning excess rebates to the retailers, the association is simply returning to the retailers funds that were theirs all along. Deductibility to association of excess rebates returned to retailers 60. It follows that no deduction is allowable to the association under section 8-1 of the ITAA 1997 upon returning excess rebates to the retailer. As the association holds the volume rebates as agent for the retailers the funds never leave the retailer's control and so cannot be a loss or outgoing of the association. As explained above, the association is simply returning to the retailer funds that were the retailer's all along. The effect of the co-operative provisions (Division 9 of Part III of the ITAA 1936) 61. The co-operative provisions do not affect the tax treatment of the arrangement under the characterisation in paragraph 28(a) even if the retailers are shareholders in the association and the association is a co-operative company for the purposes of section 117 of the ITAA 1936. 62. If the association receives the volume rebates as agent for the retailer, then it does not receive them for the storage, marketing, packing or processing of commodities, or for the rendering of services, or in payment for commodities or animals or land sold. Rather, one of the services provided by the association to the retailers is the collection of volume rebates on their behalf. This means that at the time the rebates are received they do not constitute amounts that should be included in the association's assessable income by virtue of section 119 of the ITAA 1936. 63. The result is the same if the association receives the rebates directly into a common fund. As explained in paragraph 57, an association holding money in a common fund for the benefit of contributors to that fund is a 'convenient agent' for them as a class. Hence, for the same reasons as given in paragraph 62, the rebates are not included in the association's assessable income by virtue of section 119 of the ITAA 1936 at the time they are received by the association. 64. As the volume rebates are not included in the association's assessable income, it follows that the association is not entitled to claim a deduction by virtue of section 120 of the ITAA 1936 for excess volume rebates it returns to its retailers because that section only applies to the assessable income of a co-operative company. 65. It is possible that the association is a co-operative company if amounts it receives for its own benefit are for the storage, marketing, packing or processing of commodities, for the rendering of services, or in payment of commodities or animals or land sold. If that is the case such amounts may be included in the association's assessable income under section 119 of the ITAA 1936 when the association offsets such amounts against funds it holds on behalf of the retailers. | Retailer entitled to volume rebate but redirects it to association (characterisation in paragraph 28(b)): 66. Under this characterisation: 67. This characterisation can be diagrammatically represented as follows: | Taxation consequences of characterisation in paragraph 28(b): Assessability to retailers of volume rebates paid by wholesaler 68. The assessability to the retailers of the volume rebates paid by the wholesaler is as set out in paragraph 45. Even though the association does not receive the rebates as agent of the retailers under the characterisation in paragraph 28(b), subsection 6-5(4) of the ITAA 1997 deems the retailer to have received, and hence to have derived, the volume rebates when they are applied or dealt with in any way on the retailer's behalf or as the retailer directs. Deductibility to retailers of redirected volume rebates 69. The mere redirection of the volume rebates by the retailer to the association is either not a loss or outgoing incurred in the course of carrying on the retailer's business or is a loss or outgoing of capital or of a capital nature. Therefore, it would not be deductible to the retailer under section 8-1 of the ITAA 1997. 70. Both of these views are supported on the basis that the redirection is not a working expense of the retailer's business because it does not create or acquire things (for example goods or services) that will be consumed for the purposes of that business. Rather, it is an amount paid for the purpose of receiving a corresponding amount back at a later time (and, it would appear, in the hope of obtaining a tax deduction). 71. Although the in toto redirection of the volume rebates to the association is not a deduction per se, a deduction may be available to a retailer for some part of the redirected rebates when that part is subsequently outlaid. Whether this is so depends on all the facts and circumstances including what the loss or outgoing is for and the application of any relevant provision of the ITAA 1936 or the ITAA 1997. Subject to that qualification, some examples might be: 72. Certainly, however, the redirected volume rebates would not be a deductible loss or outgoing to the extent that they are returned, or available for return, to the retailer (for the reasons set out in paragraph 70). 73. Further, to the extent the loss or outgoing is made to build up a reserve fund for future expenses (as explained in paragraph 7(vii)), it is a loss or outgoing of capital or of a capital nature. Building up that fund, whether it is used to build up the assets of the association, or to return excess amounts to the retailers, is of a capital character. The funds form a capital pool that provides an enduring benefit to the retailers, and contributions to it are therefore not deductible under section 8-1 of the ITAA 1997. Assessability to association of volume rebates redirected by retailer 74. It has been claimed that the redirected volume rebates are not assessable income to the association on the basis that they are 'contributions' made by the retailers of a common fund and hence subject to the mutuality principle. However, this is not a true characterisation of the transaction because there is no correlation between the amount of the 'contributions' and the expenditure of the association. 75. In the Sydney Water case the question was whether the amount of interest received by the taxpayer on loans made to its borrowing members constituted income in the taxpayer's hands within the meaning of the ITAA 1936. It did. The taxpayer described the borrowing members as 'contributors', arguing that their interest payments should not be characterised as assessable income due to the application of the 'mutuality principle'. The High Court rejected the taxpayer's argument that the mutuality principle applied, holding that the interest was assessable income of the taxpayer. The fact that a borrower's interest payments were in no sense a pre-estimate of the amount required to meet his proportion of the mutual liabilities incurred on behalf of the borrowers was one of the factors taken into account by Mason J (at ATC 4136), with whom Menzies, Walsh and Stephen JJ agreed, in concluding that the circumstances did not come within the mutuality principle. 76. Similarly, in the type of arrangement dealt with in this Ruling, a retailer's redirected volume rebates are not a pre-estimate of the amount required to meet that retailer's proportion of the mutual liabilities the association incurs on behalf of all the retailers. As they are gains regularly derived by the association in the course of carrying on its business they would be included in the association's assessable income under section 6-5 of the ITAA 1997. Assessability to retailers of excess rebates returned to them 77. Section 6-5 of the ITAA 1997 would apply to include any excess rebates returned to the retailer by the association in the retailer's assessable income as ordinary income. 78. The returns are gains regularly derived by the retailer in the course of carrying on its business (see Parson's principles of periodicity and business gains in RW Parsons, Income Taxation in Australia (1985), paragraphs 2.179 and 2.83)). It is clear that obtaining the excess rebates is as much an activity of the retailer's business as obtaining the volume rebates in the first place (see HR Sinclair & Son Pty Ltd v. FC of T (1966) 114 CLR 537). This view is not based on any attempt to contend that the return of the rebates is the recoupment of a deduction; it is based on the character of the return of the excess rebates itself. The effect of the co-operative provisions (Division 9 of Part III of the ITAA 1936) 79. The co-operative provisions may have some effect on the tax treatment of the association under the characterisation in paragraph 28(b) if the retailers are shareholders in the association and the association is a co-operative company for the purposes of section 117 of the ITAA 1936. 80. To the extent the volume rebates are included in the association's assessable income, the association may be entitled to claim a deduction by virtue of section 120 of the ITAA 1936 for excess volume rebates it returns to its retailer shareholders, where the rebates are allocated on the basis of the retailer's business with the association or are paid as interest or dividends on shares. | Association entitled to volume rebate (characterisation in paragraph 28(c)): 81. Under this characterisation: 82. This characterisation can be diagrammatically represented as follows: | Reasons for characterisation in paragraph 28(c): 83. If the retailer is not beneficially entitled to receive volume rebates in its own right, then it is impossible for the association to either collect those rebates 'on the retailer's behalf' or for the retailer to 'direct' payment of the rebates to the association. The association must therefore receive the rebates in its own right as part of its own business profits. | Taxation consequences of characterisation in paragraph 28(c): Assessability to association of volume rebates paid by wholesaler 84. If the association receives the rebates in its own right as part of its own business profits then it will be included in the association's assessable income as ordinary business income under section 6-5 of the ITAA 1997. Assessability to retailers of excess rebates paid to them 85. If the retailer is a shareholder in the association and the payment of the excess rebates is a distribution of the association's profits, section 44 of the ITAA 1936 applies to include the amount in the retailer's assessable income on the basis that it is a dividend paid out of profits. Otherwise, it would be assessable to the retailer as ordinary income for the same reasons as set out in paragraph 78. 86. If the payment of excess rebates to retailers is a dividend no deduction is allowable to the association under section 8-1 of the ITAA 1997. However, if that is not the case, a deduction would be allowable under section 8-1 of the ITAA 1997 to the association for the payment of excess rebates to retailers. This is because the payment is an outgoing incurred by the association in the course of carrying on its business for the purpose of producing assessable income, being the rebates received from the wholesaler. The effect of the co-operative provisions (Division 9 of Part III of the ITAA 1936) on the redirected volume rebates 87. The association would not be a co-operative for the purposes of section 117 of the ITAA 1936 because one of the businesses in which it is engaged has as its primary object the making of profits from volume rebates. (See paragraph 8 of TR 1999/14: Determining the co-operative status of a company.) | The general anti-avoidance provision (Part IVA of the ITAA 1936): 88. If, contrary to this Ruling, the retailer is entitled to a deduction for the volume rebates that go to the association, the Commissioner would consider the application of Part IVA to the arrangement in appropriate cases. These cases would likely be those where the scheme gives rise to a tax benefit in the form of a tax deduction with no matching assessable income (see paragraph 5). The Commissioner would need to have regard to the factors in section 177D of the ITAA 1936 to determine if the dominant purpose of the scheme was to obtain the tax benefit. 89. An alternative view of the taxation consequences under the characterisation in paragraph 28(b) (see paragraph 66) is that explained in paragraphs 4 and 5 of this Ruling. However, for all the reasons set out in paragraphs 68 to 78, the Commissioner does not accept that this alternative view is correct.


What this Ruling is about | Preamble: The number, subject heading, What this Ruling is about (including Class of persons/arrangements section), Date of effect, and Ruling parts of this document are a 'public ruling' for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a 'public ruling' and how it is binding on the Commissioner. | What this Ruling is about: 1. The type of arrangement set out below includes the subject of Taxpayer Alert 2002/8 - Mutual associations - deductibility of contributions and derivation of income (volume allowances). | 2. This Ruling examines arrangements involving three kinds of participant. There are individual retailers, who make purchases and seek the best possible terms for those purchases. There are suppliers, called wholesalers in this Ruling, from whom the retailers make purchases and who offer volume rebates or allowances in relation to qualifying purchases by retailers; those volume rebates or allowances generally are given as cash payments and are called volume rebates in this Ruling. There are bodies, called associations in this Ruling, which negotiate with the wholesalers terms on which retailers connected with an association may make purchases from the wholesalers that will qualify for volume rebates. It is by dealing in this way through the association that the best volume rebates are able to be obtained. | 3. The arrangements this Ruling examines have the volume rebates for which the retailers' purchases qualify, paid to the associations. Some part of the volume rebates is spent by the associations on administrative overhead, on activities benefiting individual retailers or on activities benefiting all the retailers connected with an association. A substantial balance of the rebates is then paid to the retailers, broadly according to their share of purchases from the wholesalers. | 4. The participants claim that their tax treatment under the arrangement is as follows: | 5. The claimed tax treatment, if effective, would result in the retailers concerned obtaining an income tax deduction in circumstances where they bear no corresponding economic loss. From the retailers' perspective, the volume rebates go to their association; they are partly spent to their advantage and the excess is given or available to them. The retailers claim a deduction for both the gross purchase price paid to the wholesalers and the contribution to their association, while not including in income any part of the money applied for them or returned (or available for return) from the association. | 6. This Ruling, therefore, considers the income tax consequences for the retailers and the association of this arrangement. It does not discuss the tax treatment of the wholesaler, as wholesalers have not asserted any special tax consequences for them of the arrangements compared to the usual tax consequences of giving volume rebates. | A relationship involving authority or capacity in one person (the agent) to create or affect legal relations between another person (the principal) and third parties: International Harvester Co of Australia Pty Ltd v. Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644; 32 ALJ 160. Whether 'agency' is constituted depends on the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent, rather than on language adopted by the parties: Norwich Fire Insurance Society Ltd v. Brennans (Horsham) Pty Ltd [1981] VR 981. A relationship of agency is created either by the express or implied agreement of principal and agent, by the subsequent ratification by the principal of the agent's acts done on behalf of the principal, by operation of law, pursuant to statute, or by estoppel under the doctrine of apparent (or ostensible) authority. | Evidence that a person is purporting to do acts on behalf of a principal in some capacity in such circumstances that the knowledge and approval of the principal may fairly be inferred is evidence that the principal has authorised him to act in the particular capacity. | In the words of Jordan CJ, where such an agreement exists, the association is purporting (to the wholesaler) to do acts on behalf of the retailer in circumstances that the knowledge and approval of the principal may be inferred. | An agent can be a trustee of money received on behalf of the principal where there is an understanding that the agent will keep that money separate from his or her own money. In such a case, the agent must, like any trustee, not mix that money with his or her own money... Not all moneys received by agents on the principal's behalf or entrusted by the principal to the agent are necessarily trust moneys. The agent may, instead of a trustee, be merely a debtor, in which case the above prohibition on mixing does not apply. It is usually the intention of the parties which separates the relationship of debt from that of trust... | An outgoing is the opposite of income and connotes a movement of resources out of the taxpayer's control or dominion. | In such a case, the principal, who is also bound to make the payment, has incurred a liability and assuming that the liability otherwise satisfies the criterion of sec. 51(1) is entitled to a deduction under that section. It would be strange if the agent, who has also incurred a liability, would be entitled simultaneously to a deduction of the same amount. | The description 'mutuality principle' is used, unfortunately as I think, to express the reason for the conclusion that the return to a taxpayer of a share of the surplus of a fund to which he has contributed in common with others after its use for a purpose agreed between them is not income. There is, in my opinion, no independent principle involved in reaching such a result and the description of mutuality is apt to be misleading. The creation of such a fund, its intended use and the repayment of a surplus or unused amount to the contributors will have their origin in agreements governing the amount of contribution, the purpose for which the fund may be employed, and the occasions for and the extent of any refunds. What mutuality there is, is to be found in those agreements and, in some instances, in the purpose for which the fund is to be used, i.e. for some common benefit. What distinguishes the amount refunded in such circumstances from profit or income is that the payment is made out of moneys which are in substance the money of the contributors. | Class of persons/arrangements


Related rulings: TR 92/1 TR 92/20 TR 97/16 TR 1999/14 Taxpayer Alert TA 2002/8
Legislative references: ITAA 1936 44 ITAA 1936 51(1) ITAA 1936 Pt III Div 9 ITAA 1936 117 ITAA 1936 119 ITAA 1936 120 ITAA 1936 Pt IVA ITAA 1936 177D ITAA 1997 6-5 ITAA 1997 6-5(4) ITAA 1997 8-1 TAA 1953 Pt IVAAA
Case references: AAT Case 9897 (1994) 30 ATR 1030 (1994) 95 ATC 101
Other references: Butterworths Australian Legal Dictionary (1997) GE Dal Pont, Law of Agency, Butterworths, 2001 RW Parsons, Income Taxation in Australia (1985)