Renmark Fruitgrowers Co-operated Limited v. FC of T

Judges:
Menzies J

Court:
High Court

Judgment date: Judgment handed down 17 November 1969.

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Menzies J.: The taxpayer appellant has, for the year ended 30 September 1966, been assessed to income tax on the footing that it is to be deemed not to be a co-operative company in respect of that year. The only question for determination is whether the Commissioner was correct in so assessing tax. The relevant sections of the Income Tax Assessment Act 1936-1966 are as follows-

``117. In this Division, `co-operative company' means a company the rules of which limit the number of shares which may be held by, or by and on behalf of, any one shareholder, and prohibit the quotation of the shares for sale or purchase at any stock exchange or in any other public manner whatever, and includes a company which has no share capital, and which in either case is established for the purpose of carrying on any business having as its primary object or objects one or more of the following:-

• (a) the acquisition of commodities or animals for disposal or distribution among its shareholders;
• (b) the acquisition of commodities or animals from its shareholders for disposal or distribution;
• (c) the storage, marketing, packing or processing of commodities of its shareholders;
• (d) the rendering of services to its shareholders;
• (e) the obtaining of funds from its shareholders for the purpose of making loans to its shareholders to enable them to acquire land or buildings to be used for the purpose of residence or of residence and business.

118. If, in the ordinary course of business of a company in the year of income, the value of commodities and animals disposed of to, or acquired from, its shareholders by the company, or the amount of its receipts from the storage, marketing, packing and processing of commodities of its shareholders, or from the rendering of services to them, or the amount lent by it to them, is less respectively than ninety per centum of the total value of commodities and animals disposed of or acquired by the company, or of its receipts from the storage, marketing, packing and processing of commodities, or from the rendering of services, or of the total amount lent by it, that company shall in respect of that year be deemed not to be a co-operative company.''

It is convenient to state first why the company is and was in 1966 a co-operative company as described in sec. 117. It has at all times been a company, the rules of which (1) limit the number of shares which may be held by, or by and on behalf of, any one shareholder, and (2) prohibit the quotation

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of the shares for sale or purchase on any stock exchange or in any public manner whatever. At first I was in some doubt about the first limitation, but Mr. Matheson has satisfied me about this. Then, clearly enough, the company has always been one that is established for the purpose of carrying on a business, having as a primary object the processing and packing of the fruit of its shareholders. It falls, therefore, within the description to be found in sec. 117(c). This of itself suffices to bring the company within sec. 117 but there is, I think, a further matter for consideration. From its inception the business of the company included what it is convenient to call merchandising. It bought commodities - principally fruitgrowers' requisites-for sale to its shareholders. In the course of time its merchandising business expanded so that by 1966 sales in the company's merchandising business-which by this time included the purchase and sale of general hardware-amounted to $695,966, divided into sales to shareholders of $542,838, and sales to non-shareholders of $153,128. It was argued for the company that this business, of itself, would not bring the company within sec. 117 because in 1920 when it was established it could not be said that merchandising was anything more than a subsidiary activity and that the company was not established for the purpose of carrying on such a business. It appears to me, however, that sec. 117 requires attention to be directed to the company's business, and its primary objects, at the time when the question whether or not it is to be treated as a co-operative company has to be determined. In my opinion a company which, in accordance with its constitution, is carrying on a business, having as a primary object one or more of those set out in the lettered paragraphs of sec. 117, must be regarded as a company ``which... is established for the purpose of carrying on'' that business, whether that business was carried on from the inception of the company or was developed at some later time. It is not, I think, unimportant that in sec. 117 the present tense ``is established'' has been used so that the question which arises is whether, at a particular time, the company is established for the purpose stated. I find, however, that notwithstanding the magnitude of the company's merchandising business by 1966, its main business has always been the processing and packing of fruit, the property of its shareholders. Were it necessary to determine what was the primary object of the company's business in 1966, I would say that it was the packing and processing of the commodities of its shareholders. It is to be noticed, however, that the section makes it clear that a company's business may have a number of primary objects. In this case I consider that by 1966 at any rate the company's business had at least two primary objects, one falling within the description in (a) of sec. 117, and one falling within the description in (c) of sec. 117. It seems to me that by 1966 the company was a consumers' co-operative as well as a producers' co-operative and the acquisition of commodities for distribution among shareholders had become a primary purpose of its business.

Here it is convenient to refer to an argument to the effect that the merchandising business of the company was, in truth, two businesses, one dealing merely in fruitgrowers' requisites and the other in other commodities. This contention I reject and I find that in 1966 there was, as the company's accounts indicate, one merchandising business. It is not necessary, therefore, to consider the consequences which it was said would flow from accepting the argument that there were two merchandising businesses.

I turn now to sec. 118 which can, no doubt, give rise to questions upon which opinions may differ. However, in view of the conclusion I have expressed about the application of sec. 117 to the merchandising part of the company's business, I have no doubt that sec. 118 does apply to deprive the company of the advantages of being a co-operative company in a year when the value of commodities disposed of to shareholders is less than 90% of the total value of commodities disposed of by the company. In 1966 the company was carrying on a business, having as a primary object the acquisition of commodities for disposal among its shareholders, but the value of the commodities disposed of to its shareholders, viz. $542,838, was less than 90% of the total value of commodities disposed of by the company, viz. $695,966. In these circumstances it seems to me inescapable that sec. 118 applied, notwithstanding that in that year the main part of the company's business was the processing and packing of fruit and that this business was done almost exclusively for its shareholders. The company's receipts from this business amounted to $473,396. There is,

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I think, no way of aggregating the various amounts referred to in sec. 118, viz. value of commodities and animals, receipts from storage etc., receipts from rendering services, amounts lent, in order to consider whether a particular amount, representing business done with non-shareholders such as the value of commodities sold, is less than 10% of the whole. The use of the word ``respectively'' in sec. 118 indicates that each amount specified must be considered by itself, and the enquiry or enquiries must be whether at least 90% of each amount was the result of dealings between the company and its shareholders.

I should add that had I not come to the conclusion that a primary object of the business for which the company was established in the year 1966 was the acquisition of commodities for disposal among shareholders, the fact that it was in the ordinary course of the business of the company for that year that commodities to the value of $695,966 were disposed of, of which $542,838 was received from shareholders and $153,128 was received from non-shareholders would, of itself, have satisfied me that sec. 118 applied.

I therefore dismiss the appeal and confirm the assessment made by the Commissioner.

ORDER:

Appeal dismissed with costs.