"Not carried on for the profit or gain of its individual members"
85 The Commissioner argues that the primary judge adopted too narrow an approach to the second issue. His Honour concluded that the activities of CBH were not carried on for the profit or gain of its individual members as "it cannot distribute its assets among or apply its assets to the individual benefit of its members, but must apply them to the furtherance of its objects" (at [119]).
86 This approach, the Commissioner says, compounds an acceptable "non-distribution" requirement with actually meeting the requirements of the special condition in the second limb of item 8.2.
87 The Commissioner particularly focuses on "or gain" in the special condition in item 8.2. The Commissioner says that a corporate body is carried on for gain if it makes the profit or gain itself and distributes all or part of the gain to members and also if it successfully operates so that what would otherwise be included in its profits or gains are passed to its members "severally and individually".
88 CBH assists or advances the interests of the activity concerned in the first limb and necessarily those involved in and with it. Such persons who may thus benefit may be members or may be persons who are not part of the membership of an association or society. What the negative requirement in the second limb ensures is that the taxation exemption is only available if the association is not carried on for the benefit or gain of individual members. Members may benefit along with others in the community but should not, by virtue of their membership alone, benefit more than others for whom the benefit of the activity is conducted.
89 The expression "carried on for the purpose of profit or gain to its individual members" differs from relevantly comparative expressions in other legislation and has not received a great deal of judicial attention. The question arises as to the role played by "individual" in the phrase. The decision (discussed below) in Commissioner of Taxation v Cappid (1971) 127 CLR 140 addressed the issue but in a different context. In that case the question was whether a company was a "public company" or a "private company" under the 1936 Act which, relevantly to this appeal, involved interpretation of the same key expression in the second limb of the current legislation. In Cappid, however, there were only two shareholders, one being a corporate trustee and the other an individual who held his one share as nominee of the other corporate shareholder. The company paid one of the shareholders funds, not by way of dividend, but on account of rental of property and interest on a loan from the shareholder. At first instance, Menzies J held that the expression "for the purpose of profit or gain to its individual members" did not exclude corporate members and did include the gain made by a member through renting property even though that gain was not a distribution of profit. It was held that the expression did not, however, include those companies carried on for the profit or gain of the membership as a whole or where they were carried on for the profit or gain of a specified person or body who was not a member. Menzies J held that the relevant section could not be confined to companies established for charitable purposes. The memorandum of articles precluded distribution to members (and relatives of members). On appeal, the Full Court of the High Court disagreed.
90 The second limb of the requirements was explained by Barwick CJ in Cappid (at 153) where the Chief Justice said that the function of the word "individual" was not to import the idea of "personal" or "beneficial profit or gain". His Honour said:
Its function, in my opinion, is to exclude from the operation of the paragraph those incorporated companies and unincorporated associations (…) which are carried on for the profit or gain of the membership as a whole and those which are carried on for the profit or gain of some specified person or body not being a member.
91 The Chief Justice emphasised that the focus was on corporations carried on for the benefit of their members but not for the profit or gain of their members severally or individually. At 154, the Chief Justice said:
Upon the facts I have mentioned there is no room to doubt that the company was carried on for the purposes of profit or gain. Then for whose profit and gain has the taxpayer been so carried on? No body or person has been nominated by the memorandum and articles of association of the taxpayer as the person or body for whose benefit or to whose account such profit or gain must be paid or be made available. (emphasis added)
92 Commenting on these passages in Nadir Pty Ltd v Federal Commissioner of Taxation (1973) 129 CLR 595, Gibbs J, after commenting on that passage in Cappid explored the meaning of the expression in the second limb in this way (footnotes omitted):
It was further held in that case that in considering the application of the first limb of para. (c) the court is not "concerned 'with purposes' in the sense of the subjective intention of the shareholders or of those who caused the taxpayer to come into existence" but "with the objective conclusion to be drawn from the circumstances of the operation of the company" (per Barwick C.J.). In that case the company had in fact been carrying on a business and had been earning and accumulating very considerable profits and it was held that there was no room to doubt that the company was carried on for the purposes of profit or gain. The further question that there arose, and that gave rise to the real dispute in the case, was for whose profit or gain the company had been carried on. The memorandum and articles there under consideration did not nominate any person or body as the person or body for whose benefit any profit or gain must enure, but, as Barwick C.J. pointed out, normally a company which is trading for profit is carried on for the purposes of profit or gain to its individual members. It was held that it had not been established that the company had not been carried on since its incorporation for the purposes of profit or gain to its individual members, and in this regard it was mentioned that "whenever any distribution of the profits or gains of the taxpayer takes place it must be either to or upon the order of the shareholders". Similar reasoning would lead to the conclusion that if it is right to hold that the taxpayer in the present case has been carried on for the purposes of profit or gain, it should also be held that it was carried on for the purposes of profit or gain to its individual members. The articles here differ in some respects from those considered in Cappid's case, but it remains true to say that no one is nominated as the person for whose benefit any profit or gain must be paid or made available, and that if a distribution of profits or gains were to take place upon a winding-up it would be within the power of the shareholders to direct the application of those profits or gains for their own benefit (e.g., to a company formed in their interests) even though they themselves could not directly participate in the distribution (see art. 74). The crucial question in the case then becomes whether the taxpayer was carried on for the purposes of profit or gain.
93 With CBH, however, a combination of the terms of the articles and the governing statute would preclude the possibility of profit or gain going to the members before or after a winding up.
94 Providing the purpose identified by the first limb is established, then, if as a consequence of pursuing the purpose, the members derive a benefit or gain (as in this case they clearly do), that gain or benefit will not preclude exemption unless it is a gain produced only by reason of individual membership. In those cases where it is clear that the first limb purpose is directed to a broader community objective than just to the individual members, the incidental gain or benefit achieved as a member does not disentitle exemption for the association because that incidental gain or benefit is not received by reason of membership but is received in conjunction with all grain growers in Western Australia whether members or not. That benefit is received from the application of revenue or profits of CBH being applied to research, quality control in grading storage and handling, and through the facilities developed to serve and secure markets for grain grown in Western Australia. There is no differential charge imposed by CBH for its services, depending on whether the grower is or is not a member.
95 In all cases of exemption, it must be the position that it is not open to the body to disburse any profits or dividends to members. Statute prevents that course being pursued in the case of CBH. The BHA 1967 (s 35A) expressly imposes obligations on CBH which reflect an intention that its functions serve a broader community than those of the immediate individual members alone. While it is true that most grain growers/deliverers in Western Australia are members of CBH and it is also true that the efficiency of CBH will produce financial benefits for growers and others affected by the grain industry, members of CBH do not gain that benefit or gain solely by being members. They could be grower/deliverers and not be members and achieve the same gain or benefit.
96 On the approach taken by the courts to this and similar legislation, that is sufficient to satisfy the second limb of the requirement under the statutory test for exemption. A case which comes closest to the point for which the Commissioner would argue is an Administrative Appeals Tribunal (the AAT) case, Tribunal Case 80 (1987) 18 ATR 3579 (discussed below), concerning sugar cane farmers in Queensland but the approach taken by the AAT in that case, as reflected in one of the subsequent AAT decisions, was to recognise that the body was carried on for the benefit of its individual members (a small group) because the purpose of the limited and specific activity carried out by that body was directed expressly to obtaining an immediate gain for the individual members. The other cases discussed below reveal that where a broader purpose prevails, incidental benefits to members including specific benefits created by the body to induce membership, would not fall within the second limb so as to disentitle exemption. It is to be acknowledged that the bodies concerned in earlier cases did not attract revenue of anything like the same dimension as that of CBH. But the size and nature of the revenue activity, on the authorities, appears more likely to fall for consideration in the broader question addressed in the first limb of the statutory test.
97 Turning to the handful of other authorities which might throw light on the meaning of the second limb, the first case approached the question just as the primary judge did in South Australian Cooperative Bulk Handling Limited v Commissioner of Taxation, being a Taxation Board of Review decision on 24 December 1959, Reference number M.49/1959, (at [25]) the Board said:
25. I turn now to consider whether a company is "not carried on for the purposes of profit or gain to the individual members thereof." On the evidence before the Board it is clear that the members are not entitled to participate in any profits made by the company. The company is prohibited by its articles from making either directly or indirectly any distribution of profits to members by way of dividend, bonus or otherwise; nor are the members entitled to participate in any distribution of surplus upon the winding up of the company. The articles specifically state that "the income and property of the company shall be applied towards the objects of the Company." It should therefore be held I think that the company passes the second test laid down in s.23(h).
98 Further in South Australian Cooperative Bulk Handling Limited v Commissioner of Taxation, the Board noted that evidence was given that the operations of the company from the point of view of the industry generally, had had most beneficial effects. In particular, the turnaround of ships was substantially faster, labour and handling costs had decreased and there had been a saving of expense of corn sacks. The result was the provision of a larger surplus in the hands of the Australian Wheat Board for distribution to wheatgrowers throughout the Commonwealth. In addition, the company in the 1956-1957 and following seasons has sorted and classified wheat to meet the requirements of overseas buyers. It was also said that the operation of the bulk handling systems would lead to the growing and marketing of an improved quality of wheat. The member said:
It would be surprising if individual growers themselves did not benefit from the installation and operation of the system by the company; indeed, the evidence was that they did so benefit. But in my view, the facts lead inevitably to the conclusion that the general purpose and effect have been the development and advancement of the wheat-growing industry in Australia.
99 In other words, the Taxation Review Board in relation to the comparable body in South Australia was of the view that simply the existence of the prohibition on the members being entitled to participate in any profits made by the company was sufficient to satisfy this test.
100 At a more modest level still, in Inland Revenue Commissioners v Yorkshire Agricultural Society (1928) 1 KB 611, the Society which had been formed over 90 years earlier held annual meetings for exhibiting farming stock and such like and for the general promotion of agriculture. Its members did derive benefits including financial benefits of discounts on various services provided by the Society such as the analysis of manures and food stuffs at reduced fees. Its income was derived from services given including entry fees and gate receipts, local subscriptions for prizes, interest on investments and subscriptions of members. Any income over expenditure was invested and in the event of losses, the loss was met by sale of investments. The Society was assessed to income tax on the income of its invested funds. The Special Commissioners concluded that the Society was established for charitable purposes only and allowed its claim for exemption. Rowlatt J reversed that decision on appeal concluding that the objects of the Society were partly objects for the benefit of the members only. The Court of Appeal allowed an appeal. Lord Hanworth MR considered (at 620) that the benefits to the members in the form of various privileges attaching to membership of the Society could be disregarded. The fact that benefits accrued to members of the Society did not detract from the fact that the Society had been established for the purpose of improvement of agriculture as a whole and not for any confined purpose of benefiting only the particular members of the Society or those resident in the locality to which its name attached. Atkin LJ also allowed the appeal. His Lordship said (at 631):
There can be no doubt that a society formed for the purpose merely of benefiting its own members, though it may be to the public advantage that its members should be benefited by being educated or having their aesthetic tastes improved or whatever the object may be, would not be for a charitable purpose, and if it were a substantial part of the object that it should benefit its members I should think that it would not be established for a charitable purpose only. But, on the other hand, if the benefit given to its members is only given to them with a view of giving encouragement and carrying out the main purpose which is a charitable purpose, then I think the mere fact that the members are benefited in the course of promoting the charitable purpose would not prevent the society being established for charitable purpose only.
101 Lawrence LJ agreed holding that the crucial question was whether the Society was established for the promotion of agriculture generally or was established for the promotion of the interests of its members and their respective businesses. His Lordship noted (at 637) first that the Solicitor-General had argued that the society was a members' society because the society was originally founded for the main purpose of holding an annual show primarily for the pleasure and benefit of its members and, secondly, that the Society did in fact confer privileges and personal benefits upon its members. He held that the first ground was not established on the proper construction of the founding resolutions. As to the second, the objects of society on the one hand and the inducements in the shape of personal benefits held out to persons in order to procure their membership and to obtain their subscriptions on the other are two entirely different things:
It is a common thing for a charitable institution to offer all kinds of privileges and benefits which are in no sense charitable in order to obtain funds for the purpose of carrying out its objects … Many charitable institutions, in return for annual subscriptions or donations, offer special benefits to the persons who become their members. None of the operations of this kind results in making the purposes of the institution non-charitable.
102 Similarly, many years later in Incorporated Council of Law Reporting for England and Wales v Attorney-General and Others [1972] 1 Ch 73, the Court of Appeal held that it was immaterial that the publication of the reports (in circumstances where profit could not be returned to members) also supplied professional men with the tools of their trade. Russell LJ said (at 86-87) (footnotes omitted):
It was next contended for the Commissioners of Inland Revenue that a main purpose, even if not the only main purpose, of the association is to advance the interests of the legal profession by supplying it with the tools of its trade. Reference hereunder was made to the fact that the association and its unincorporated predecessor were brought into being by members of the legal profession: to the fact that it is to be supposed that the main body of "consumers" would be such members: to the fact that Scrutton J. in Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 3 K.B. 674, 681 (very much by the way) remarked that the association "publish The Law Reports for the benefit of the profession": and to the fact that Lord Simonds' Law Reporting Committee appointed by Viscount Caldecote L.C. in 1940 contained this reference to the aims of the association:
"No other purpose was to be served than to produce the best possible reports at the lowest possible price for the benefit of the profession and of the public at large."
To this may be added the comment of Professor Goodhart, a member of that committee, that the committee recommended continuance of The Law Reports in their established form "as they perform an essential function for the legal profession." I am not persuaded of the validity of this contention. It seems to me that if the publication of reliable reports of decisions of the courts is for the benefit of the community and of general public utility in the charitable sense, it is an inevitable and indeed necessary step in the achievement of that benefit that the members of the legal profession are supplied with the tools of their trade. I do not see how the benefit to the public, assuming it to be a charitable object, could otherwise be achieved. So it would be if there were a non-profit-making association under gratuitous professional supervision for the production at moderate expense of pure medical drugs or efficient surgical instruments. But the only main object or purpose in such case would be, it seems to me, the relief of the sick. We were in this connection referred to a number of cases, some on one side of the line and some on the other, where the question was whether a main object was the promotion of the interests of a professional body or organisation. I do not find these helpful. Here the association consists of members who as such can derive no conceivable benefit from their gratuitous supervision of the activities of the association. Nor to my mind is the contention now under consideration fortified, as was I think at least at one stage in argument suggested, by the fact that clause 3 of the memorandum of association does not open with the words: "The objects for which the association is established are to advance and promote the proper development of law by the following means:".
Accordingly I reject the contention that the association is not established for purposes which are exclusively charitable in so far as that contention is based upon the submission that a main purpose or object is to supply members of the legal profession with tools of their trade. (emphasis added)
103 The Commissioner refers to two decision of the AAT which are said to have persuasive force for the argument the Commissioner advances. In Case 80, the AAT considered whether a company formed to provide bridging finance for a water storage project was exempt from income tax under the former s 23(h) of the 1936 ITA Act. The membership of the company was limited to sugar cane growers in a defined area in Queensland assigned to a particular mill. The members were levied for initial capital. The company was established to facilitate the early construction of the water storage by borrowing money to contribute to the cost of the project until Government funds became available. Everything it did was directed to that end. It had no other purpose and played no other part in the construction of the water storage. The AAT found (at [37]-[38]) that there never was any intention of making a "profit" for the members. In concluding that the company was nevertheless carried on for the purposes of "gain" to its members and was outside the terms of s 23(h) (at [43]), the AAT held that "gain" means the improvement, benefit or advancement obtained and includes other considerations of value obtained and was something wider than "profit" which requires the improvement, benefit or advancement obtained be quantifiable in some way (at [41]). The AAT decided (at [40]) there was a "gain" to the individual members of the company as:
(a) The purpose of the applicant was to obtain increased available water storage for its members and this additional water storage was obtained earlier than it would have been provided if Government financing had been relied upon;
(b) As part of the agreement with the Queensland Government the members of the company achieved additional water allocations at concessional rates of payment to the Government.
104 Significantly and unlike CBH, the persons who were entitled to be members were an exceptionally limited class. Clauses 5 to 12 of the constitution had the effect of limiting membership to sugar cane growers in the defined area who were assigned to a particular mill. It was a specific class of members related to a specific mill who were contributing the initial capital to build a weir on the river which would service that mill. When they were finished building the weir, any surplus from doing so was to be returned to them. They wanted the weir built quickly; the Queensland Government was not prepared or willing to advance the requisite funds immediately, so they put in the money themselves and were to be repaid by the Queensland Government in due course.
105 However, unlike the applicant in Case 80, statutory requirements compel 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. Under the BHA 1967 CBH is obliged to provide services and facilities including receiving all grain delivered to it (s 42) whether from members or others. It is required to deliver the same quantity and type of grain to all buyers (s 44) and to issue weighbridge tickets and warrants (s 36 and s 37). The warrants enable growers and others to trade grain and take delivery under the bulk system. CBH does not obtain title to the grain. It is obliged to test grain and to determine the standards of grain (s 43) and to ensure grain which is delivered (s 11). It is required to satisfy the Government of Western Australia in relation to those matters by forwarding balance sheets and revenue accounts to the minister for tabling in Parliament and to give the Auditor-General access to its books (s 12). It is obliged at law to apply its surpluses to the purposes for which it was established not by way of distribution amongst its members (under s 35A which has been discussed). The extent of obligations and scrutiny imposed on CBH are rather more consistent with those which might be expected of a public authority rather than a privately owned company with a small membership established for a short term single purpose operation.
106 The second case to which the Commissioner refers is AAT Case 9723 (1994) 29 ATR 1102. There the AAT considered whether an association of surveyors was exempt from income tax under the former s 23(h) of the 1936 ITA Act. The AAT was satisfied that the association was not carried on for the profit or gain of its individual members and while the members did benefit, it was not in the sense in which "profit" or "gain" appear in s 23(h). The benefit they received was the usual benefit that arises with all professionals who belong to a body which looks after the interests of their profession such as the coordinating of professional education, promoting the profession and lobbying for the profession. Such gains are not quantifiable in any commercial sense although pursuing those ends improves the professional standing and business prospects of the members. The AAT concluded this position was different from that of the members of the company in Case 80 where the whole purpose of the formation of the association and the arrangements made by the company for additional water storage facilities was for growers to get access to additional water storage for their commercial operations and also to get water at a discounted price, which benefits were entirely to do with the commercial operations of the growers and of gain to the members and was a quantifiable gain in commercial terms (at [22]).
107 The Commissioner argues that CBH's operations are conducted on a commercial basis and have provided substantial assets and income. CBH does provide value-adding services for its members by way of modernised storage facilities, research facilities, and new technologies together with its investment in subsidiaries pursuing a range of other activities. For decades CBH's strategy has been that its returns flow so as to decrease the costs to growers. Members severally and individually derive gains from CBH cost effectively handling the grain they have produced. These are gains directly connected to the members' individual commercial operations. These gains, the Commissioner argues, are not incidental benefits.
108 That there has been substantial growth in the quantity and nature of activities of CBH cannot be doubted. The expansion and improvement of grain handling facilities and techniques and research and development activities and the "Grain Express" initiative cannot be ignored. They are part of the whole of CBH's activities which are to be examined in ascertaining the purpose for which it is established. In this regard, the statutory prohibition on distribution or application of its assets for the benefit of its members, while not being determinative, is clearly an important consideration.
109 It is not enough to attract the disqualification in the second limb special condition that members benefit or gain from the activities of CBH. It is entirely conceivable that every organisation which is legitimately entitled to the exemption afforded under s 50-40 of the Act achieves a benefit to its members, incidentally or otherwise. That in turn is entirely consistent with the very purpose of the organisation being established and being given exemption.
110 It is important in construing the second limb not to overlook the word "individual" in relation to members. That the activities of CBH enable the grain industry in Western Australia as a whole (not even just the growers) to flourish does not mean that it is carried on for the profit or gain of individual members.
111 In contrast with the cases relied upon by the Commissioner (Cappid and the two Tribunal cases), the collateral benefits there arising were afforded only to the members of the companies concerned. In contrast, by statute, CBH must make its facilities available to any producer of grains whether or not a member (ss 19, 42 and 17 of the BHA 1967). Equally, the development activities described at [47]-[49] enure for the benefit of the industry as a whole not solely for members of CBH.
112 While members do benefit from the activities of CBH, in its grain handling and storage activities, they do so to no greater extent than, and have no preference over, non-members who deal with the company, and in these circumstances such benefits do not accrue to them as "individual members".
113 It follows that CBH is not carried on for the "profit or gain of its individual members".