Commissioner of Taxation v Co-operative Bulk Handling Limited  FCAFC 155
Sometimes a body is exempt from tax if it is “not carried on for the profit or gain of its individual members”. However, the full Federal Court has found that a body can satisfy this criterion even if members of the body profit or gain from the activities of the body. However, this profit or gain must be as a member of the public, not as an individual member of the organisation. This finding was quite specific to the facts. Details of the case are set out below.
Co-operative Bulk Handling Limited (CBH) was established in 1933 for the objects of establishing, maintaining and conducting schemes for the bulk handling of wheat and grain. It was later converted to a co-operative company. Current activities of CBH included:
(1) storage, transport, classification and other handling of wheat and grains;
(2) quality control;
(3) research for the above;
(4) developing facilities to serve and secure markets for grain grown in Western Australia;
(5) charging grain growers and deliverers for its services;
(6) purchasing shares in tax paying subsidiaries of CBH; and
(7) using income and profits to further its objects and to minimise the cost of providing CBH’s services.
Under the Income Tax Assessment Act 1997 (Cth) (Act) and CBH’s Articles of Association, CBH: (1) must apply all of its income and property towards the objects of CBH; and (2) must not pay or transfer any part of CBH income or property to any CBH member as a profit, directly or indirectly, before or after CBH is wound up. CBH generates a lot of income. For example, in the financial year of 2007 its gross income was approximately $233 million resulting in a loss of $47,000. In 2006, CBH’s income was $321 million with a profit of $83 million.
The issue was whether CBH was exempt from tax under 50-1 of the Act from 31 October 2009 to 31 October 2012. The relevant section, 50-40 item 8.2(a), provides that a society or association will be exempt from income tax if it is: (1) established for the purpose of promoting the development of Australian agricultural resources (First Limb); and (2) not carried on for the profit or gain of its individual members
The First Limb
CBH satisfied the First Limb. The Court found, on the facts, that the activities of CBH were to develop the grain growing industry in Western Australia. The quantum of CBH’s income and its commercial efficiency did not affect this finding because CBH’s surplus was applied towards this object.
The Second Limb
Of more interest is the Court’s analysis of the Second Limb. The Court found it conceivable that every body properly afforded a tax exemption under section 50-40 of the Act would benefit its members.
Therefore, it held that: (1) if a body is tax exempt because of particular tax exempt objects (such as under the First Limb); and
(2) those objects are directed to a broader community objective than just to the individual members of the body,
then: (3) if members of the body profit or gain along with other members of the community (i.e. as a member of the community); and(4) this profit or gain is as a consequence of the body pursuing the tax exempt objects,
then: (5) the profit or gain by the members will not preclude exemption under the Second Limb; unless
(6) the profit or gain is a gain produced only by reason of individual membership (i.e. membership of the body).
Members of the body must not, by virtue of their membership alone, benefit more than others for whom the benefit of the activity is conducted. It must not be open to the body to disburse any profits or dividends to members.
The Court found CBH satisfied the Second Limb because:
(1) statute compels CBH to act not only in the interests of its members but also in the interests of the members of the grain industry as a whole; (2) statute and CBH’s Articles of Association precluded the possibility of profit or gain going to members before or after winding up; and (3) CBH members profited and gained from CBH’s current activities (outlined above) along with all grain growers in Western Australia.
They did so to no greater extent than, and without preference over, non-members who dealt with CBH. In particular, there was no differential charge imposed between members and non-members by CBH for its services. Growers and deliverers that were not CBH members benefited financially from CBH’s commercial efficiency as much as CBH members. Thus, the benefits to CBH members did not accrue as “individual” members. The Court also found that the quantum of income was more likely to fall for consideration in the broader question of the First Limb.
The reasoning of the Court was centred on the wording of the Second Limb, and in particular the adjective “individual”. Therefore, this case is of most relevance to bodies that are expressly required by the Act to “not be carried on for the profit or gain of its individual members”. These include societies and associations that carry on hospitals or are for the purposes of community services, tourism, aviation, agricultural and other resources, information and communications technology resources, science, music, animal racing, art, game, sport and literature.