Brookton Co-operative Society Ltd v Commissioner of Taxation - [1981] HCA 28 - HCA 1981 case summary — Zoe

CTHHCA

Brookton Co-operative Society Ltd v Commissioner of Taxation

[1981] HCA 28

High Court of Australia|1981-06-12|Before: Wilson JJ, Mason J

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Source facts

Court

High Court of Australia

Decision date

1981-06-12

Before

Wilson JJ, Mason J

Source

Original judgment source is linked above.

Judgment (105 paragraphs)

[1]

High Court of Australia Gibbs C.J. Mason, Murphy, Aickin and Wilson JJ. Brookton Co-operative Society Ltd v Commissioner of Taxation (Cth) [1981] HCA 28

[2]

ORDER Appeal dismissed with costs. Cross-appeal dismissed with costs. Applications for special leave to appeal refused with costs.

[3]

I have had the advantage of reading the reasons for judgment prepared by my brother Mason and those prepared by my brother Aickin. I agree with them that the appellant company did not fall within the description of a "co-operative company" contained in s. 117 (1) of the Income Tax Assessment Act 1936 Cth, as amended. In other words it was not "a company which is established for the purpose of carrying on any business having as its primary object or objects one or more of the following: (d) the rendering of services to its shareholders". Since the material facts and the questions raised are stated in the judgments of my brethren I may express my reasons very shortly. The evidence establishes that one purpose for which the appellant was established was to render services to its shareholders in relation to the purchase of wine, but that the dominant purpose for which it was established was to hold shares in subsidiary companies which would engage in share trading and dividend stripping, so that both the appellant and the subsidiaries would benefit, from the point of view of income tax, from the circumstance that the appellant was a public company. This conclusion of fact disposes of the matter; the appellant does not answer the description contained in s. 117 (1). The main argument presented for the appellant was that the appellant was established for the purpose of carrying on only one business - that relating to the purchasing of wine - and that such business was one whose primary object was the rendering of services to its shareholders. It was then said that the other purpose for which the appellant was established, not being the purpose of carrying on a business, was irrelevant. This argument proceeds on a view of the effect of the sub-section which cannot be accepted. The relevant words of s. 117 (1) require that two questions should be considered - first, whether the company is established for the purpose of carrying on any business, and, if so, whether such business had as its primary object or objects any one of those described in the lettered paragraphs of the sub-section. The use of the present tense in the phrase "is established" makes it necessary to consider the purpose for which the company was carried on in the relevant income year, rather than at the time of its formation. If the company is established for a purpose other than that of carrying on a business, it does not answer the description. It is therefore immaterial whether or not the activities which the appellant carried on in relation to its subsidiaries could be described as a business. If they could be so described, the business did not have as its primary object the rendering of services to its shareholders, and on no view could it be said that the purpose for which the company was established at the relevant times was that of carrying on a business of the kind described in s. 117 (1).

[62]

The taxpayer, Brookton Co-operative Society Ltd., was incorporated on 28 July 1971 under the provisions of the Co-operation Act 1923 N.S.W., as amended, as a co-operative company. Its objects as set out in r. 5 of its rules in accordance with the provisions of that Act, may be summarized by saying that they were the acquisition of commodities for disposal or distribution among its shareholders and no others, and the rendering of services to its shareholders and no others. Those two "objects" were expanded in par. (c) which specified a variety of commodities to be sold to the shareholders or specified a variety of commodities to be purchased on behalf of the shareholders or to be sold to them and a variety of services to be provided to the shareholders. The evidence, in so far as it may be material, shows that the promoters of the society and its original shareholders and directors had at the time of the incorporation intended that the society would engage in buying wine for its members. However it was not intended that its activities would be restricted to buying and selling wine. It appears that the provision of a service to shareholders by procuring wine on their behalf was first raised at a meeting of directors on 12 August 1971. A manager was appointed and he made arrangements with various suppliers and placed orders with them on behalf of shareholders, the taxpayer receiving a commission from the vendor on those orders. That activity began in October 1971 and continued in a small way throughout the years of income in question. The total orders in the first year were a little over $4,000 on which the taxpayer earned a commission of $408. At the time of its incorporation or immediately thereafter there were seven directors and, subject to one change which occurred in August 1971, those directors remained in office throughout the first year of income. Two other directors resigned and were replaced in the two succeeding income years. Three of the directors, Messrs. Bainton, Grant and Smith, remained directors throughout the relevant period. At the time of incorporation there were approximately thirty members. The number increased to about fifty by 30 June 1974, although it appears that only about half of the members took advantage of the services provided by the taxpayer in relation to the purchase of wine. It is not in dispute that purchase of wine and supply was the only service to members which was provided by the taxpayer which fell within the objects set out in the rules and was within the scope of the Co-operation Act.

[81]

Their Honours also said [21] : But the words "company which is established for the purpose of carrying on a business having as its primary object or objects" are the all-important words of the provision; and it is apparent that these words must be read in the closest apposition with the description of objects contained in the respective lettered paragraphs. Each paragraph emphasises the relation of the shareholder to the activity which represents the business. The business must be conducted for performing a particular function for the shareholders. Thus its primary object must be to distribute among them animals or commodities acquired for that purpose or to dispose of such animals or commodities to them. Or it must be to acquire animals or commodities from them for the purpose of disposal or distribution. Or it must be to provide the shareholders with such facilities or requirements as storage, packing, processing or marketing. Or it must be to provide them with services. Finally, there is par. (e) concerning loans to them for the purposes specified. The purpose of the business must be to provide the shareholders with these services, facilities or advantages. True it is that the shareholders will obtain these things on a business footing. They will sell or buy the goods, pay for the storage and so on, as any customer would. But it is because the company's business is to render what in a wide sense may be called the services to the shareholders that it is considered proper for it to return the profit to them as dividend etc. without paying tax upon it. That seems to us to be the factor which limits the operation of the wide formula of s. 117 and excludes the present case from it. And again their Honours said [22] : Yet what s. 117 demands is a business whose primary object was to do that or to render some other of the specified services to the shareholders. Neither in the hands of the old company nor in the hands of the new company was the business conducted for the primary object of serving the purposes of the wholesale butchers as shareholders by acquiring the runners forming a by-product of their trade. The dominating motive so it would seem was to earn profits for the holders of A and B class shares. The motive of allotting shares to the suppliers of runners was subordinate even if powerful. No one can doubt that one motive was to obtain the advantage of the allowance or allowances given by s. 120 (1) (a) and (b). Motive, of course, is not purpose, that is to say it is not necessarily purpose or object. But it seems clear enough that it was not the primary object of the business to acquire the runners from the shareholders of the company or to process their commodities. But for the tax allowance, the runners of any one else would have done as well. On this point, Fullagar J. said [23] : It would be dangerous, I think, to begin in this case with any a priori conception of the differentia between a co-operative company and companies generally, and of the reason or reasons for showing favour to such a company in matters of taxation. The only proper course is to take the words of the statute, and inquire whether this company comes within them. The first thing to be noted is that the section speaks of the primary object of the business for the purpose of carrying on which the company is established. We may, of course - and indeed, I think, must - look at the company's memorandum of association, but this cannot be conclusive either way. We must in addition look at the activities actually carried on by the company, and at its history, constitution and control, for all or any of these things may throw light on the purpose of its establishment and the primary object of its business. He also said [24] : The memorandum is inconclusive. When, however, we look at the history of the company, its constitution, and the activities actually carried on by it, it becomes plain, in my opinion, that the company does not fulfil the third condition prescribed by s. 117. Its predecessor was an ordinary trading company, which in 1946 created a new class of shares - "C" shares - and issued some 600 of them to certain wholesale butchers, who happened to be suppliers of runners to the company. The sole purpose of the creation and allotment of the "C" shares and of the establishment of the new company was to seek the benefit of s. 120 of the Assessment Act. This was perfectly legitimate, but it was not a purpose mentioned in s. 117. 1. (1958) 98 C.L.R., at pp. 648-649. 2. (1958) 98 C.L.R., at p. 650. 3. (1958) 98 C.L.R., at pp. 650-651. 4. (1958) 98 C.L.R., at p. 656. 5. (1958) 98 C.L.R., at p. 657.

[95]

There are two conceptions involved, the first the purpose of keeping the company in operation (i.e. "established") and the second the primary object of its business. The purpose for which it is established must be the carrying on of a business having one or more of the permitted activities as its "primary object or objects" if it is to be a co-operative company within s. 117 (1) of the Act. If in any particular year the company is not "established", in the sense of being brought into or kept in operation for the purpose of carrying on a business having the requisite primary object, then the fact that it may in that year carry on that business will not be sufficient to make it a co-operative company. The section appears to me to proceed on the basis that there must be a single purpose for which a company was maintained in operation in a particular year in order to qualify as a co-operative company. It is not in my opinion a question of seeking some "principal or dominant purpose"; it is not the same kind of inquiry as is necessary in relation to the ascertainment of "the primary object or objects" of a business actually carried on. If a company is kept in operation in a particular year for the purpose of carrying on a business having as its primary object one of the permitted activities and also for the purpose of carrying on some other activity or for a purpose of carrying on some other business, then it will not qualify as a co-operative company unless that other business has as its primary object one of the permitted activities. I do not consider that the subjective or announced purposes of the promoters of the company or of its directors are material to the consideration of these questions. They are to be answered by reference to what the company actually does. If it embarks on or carries on two or more businesses, only one of which falls within the permitted list, then in my opinion it cannot be said to have been established, i.e. brought into or kept in operation for the purpose of carrying on the co-operative business but is so maintained for the purpose of carrying on both the permitted business and the other businesses. The passage which I have quoted above from the judgment of Fullagar J. in Ruffy's Case [29] makes it clear that it is what the company actually does which determines its status. It may be observed that in Revesby Credit Union Co-operative Ltd. v. Federal Commissioner of Taxation [30] McTiernan J. examined in some detail what the Credit Union there did in its actual operations on a day to day basis and the basis upon which the society conducted its operations by the promotion of discussion amongst members, the giving of advice and assistance in relation to financial matters and the like [31] . McTiernan J. said of Ruffy's Case [32] :