Cooperative Bulk Handling Ltd v Commissioner of Taxation

1. On the cover sheet of the Judgment, the catchwords have been amended by inserting the words "of Australian agricultural resources" after the words "promoting the development".

I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Gilmour. Associate: Dated: 28 May 2010 IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION WAD 292 of 2008

1. The appeal be allowed. 2. The objection decision of the respondent, notice of which was issued on 25 November 2008, be set aside. 3. The respondent rule on the question stated in the notice of private ruling by substituting the word "Yes" for the word "No" under the heading "Ruling". 4. The respondent pay the costs of the applicant to be taxed if not agreed. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

GENERAL DIVISION WAD 292 of 2008

REASONS FOR JUDGMENT 1 The applicant, Cooperative Bulk Handling Ltd (CBH) appeals under Part IVC of the Taxation Administration Act 1953 (Cth) (the TAA) against the objection decision of the respondent, the Commissioner of Taxation (Commissioner), notice of which was issued on 25 November 2008 disallowing its objection dated 30 September 2008. CBH is the major operator of grain bulk handling in Western Australia. The objection decision took the form of a private ruling by the Commissioner as follows: Ruling Whether or not CBH (not the CBH group) is exempt from taxation under section 50-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) in the years ended 31 October 2009 to 31 October 2012 on the basis that it is an exempt entity under Item 8.2 in the table in section 50-40 of the ITAA 1997? No. 2 The Commissioner formed the opinion for the purpose of his ruling that CBH was: 1. not an exempt entity under Item 8.2 in s 50-40 as it: (a) was not established for the purpose of promoting the development of Australian agricultural resources; (b) was carried on for the profit or gain of its individual members; 2. accordingly not exempt from income tax under s 50-1. 3 CBH submits, in effect, that the ruling should have been that CBH is exempt from taxation during the period in question.

Background to ruling 4 On 27 March 2008, CBH applied for a private ruling asking the Commissioner to rule on whether CBH is exempt from income tax under s 50-40 of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) in the years ended 31 October 2009 to 31 October 2012. 5 The application was made pursuant to Division 359 of Schedule 1 of theTAA which provides for the Commissioner to make private rulings. Section 359-1 provides that a private ruling is an expression of the Commissioner's opinion of the way in which a relevant provision applies, or would apply, to the taxpayer in relation to a specified scheme. 6 On 10 June 2008, the Commissioner emailed a request for information in relation to the private ruling application. On 12 June 2008, CBH's solicitors emailed a response on its behalf. 7 On 7 August 2008, CBH gave the Commissioner notice under s 359-50 of theTAA requiring the Commissioner to make a ruling. The effect of the notice was to require the Commissioner to make a ruling within 30 days of the notice failing which CBH had the right to object in the manner set out in Part IVC of the TAA by lodging with the objection a draft private ruling. 8 The Commissioner requested further information on 29 August 2008 and CBH's solicitors emailed a response on its behalf on 19 September 2008. 9 The Commissioner did not make a ruling by the expiry of the 30 days under s 359-50 and on 30 September 2008, CBH lodged a notice of objection with a draft ruling. 10 Where an objection is made against the Commissioner's failure to make a private ruling s 14ZY(1A) of the TAA provides that the Commissioner must: (a) make a private ruling in the same terms as the draft ruling lodged with the objection; or (b) make a different private ruling. 11 On 25 November 2008, the Commissioner issued notice of his decision on CBH's objection together with notice of a private ruling. In making his decision on the objection the Commissioner made a different private ruling to the draft ruling lodged with the objection. CBH then appealed to the Court against the Commissioner's objection decision.

The applicant's onus 12 In an appeal against an objection decision, the provisions of s 14ZZO apply. In this case relevantly, under s 14ZZO(b)(iii) CBH has the burden of proving that "the taxation decision should not have been made or should have been made differently". The 'taxation decision' is relevantly the 'objection decision' to issue a ruling different to the draft ruling. The 'taxation decision' is not the Commissioner's failure to make a ruling within the period prescribed by s 359-50 because under the definition in s 14ZQ of the TAA, 'taxation decision' is the decision against which a taxation objection may be made and which in this case has been made. Section 14ZZ of the TAA applies if a person is dissatisfied with the Commissioner's objection decision, "including a decision under s 14ZY(1A)(b) to make a different private ruling". 13 The onus on the applicant is to satisfy the Court that the Commissioner's opinion on the application of the law to the specified scheme is incorrect. The Commissioner correctly submits that this onus is not discharged by putting in issue the Commissioner's explanation of his opinion on the application of the law. The explanation accompanying his ruling is stated not to form part of the ruling. The way the explanation is expressed does not determine the correctness of the Commissioner's ruling on the application of the law. What is relevant is the proper application of the law to the specified scheme.

Jurisdiction with respect to the specified scheme 14 The Court's powers on an appealable objection decision are set out in s 14ZZP as follows: Where the Federal Court hears an appeal against an appealable objection decision under section 14ZZ, the Court may make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision. 15 When making his ruling the Commissioner does not make findings of fact. Rather he identifies facts and states his opinion about the way the tax laws apply to those facts. It is open to him to describe a scheme by incorporating descriptions from other documents and/or by reference to listed documents and correspondence. The facts, insofar as the incorporated and referenced materials include assertions of fact, are used in the scheme description on the basis that the facts stated by the applicant are correct. Their use does not amount to findings of fact or the acceptance of facts by the Commissioner: Commissioner of Taxation v McMahon (1997) 79 FCR 127 at 133; Bellinz v Commissioner of Taxation (1998) 84 FCR 154 at 160; Lamont v Commissioner of Taxation (2005) 144 FCR 312 at [23]. 16 In reviewing the Commissioner's opinion on the application of the law to the specified scheme, the only material to which the Court can have regard is the ruling and documents identified in the description of the scheme which were either provided by the applicant or were used by the Commissioner: Bellinz v Commissioner of Taxation at 160. The Court is confined by the scheme description in the ruling, which remains constant throughout any appellate process. Neither the Commissioner nor the applicant can make good any deficiency in the scheme description. The Court is unable to consider a different scheme; it cannot investigate the facts on which the Commissioner's opinion was formed and make its own findings of fact, make assumptions, redefine the scheme or create its own description of the scheme: Hastie Group Ltd v Commissioner of Taxation (2008) 172 FCR 496 at [3], (a case under Division 359 of the TAA); Commissioner of Taxation v McMahon at 133, 141 and 145; Lamont v Commissioner of Taxation [13], [21] and [26].

Factual basis of ruling 17 The facts on which the Commissioner ruled, are set out in the application for private ruling, the accompanying documents and the supplementary information supplied in response to the Commissioner's enquiries. I have necessarily ignored any parts of the relevant documents which are tendentious, argumentative, or a gloss on the facts. What follows are the relevant facts described in those documents.

Legislative history 18 CBH was incorporated in 1933 towards the end of the Great Depression for the purpose, stated in its Memorandum of Association as its principal object, of establishing maintaining and conducting any schemes or systems for handling of wheat and/or other grain in bulk. Prior to the establishment of CBH, most wheat harvested in Western Australia was bagged at the farm for handling, by road and rail, and then exported, primarily through the ports of Geraldton, Fremantle, Bunbury and Albany. It was the subject of the 1935 report of the Royal Commission on the Bulk Handling of Wheat. 19 The report concluded that the handling of wheat in bulk by CBH in the 1933-34 seasons had been of advantage to the wheat growing industry of Western Australia, and that, subject to control by the Parliament, CBH should be allowed to extend and carry out the proposals for a state wide scheme relating to the bulk handling of wheat, including the development of new sidings and up to date port facilities. Later the Bulk Handling Act 1935 (WA) (the BHA 1935) was enacted, according to its preface, to regulate the business of CBH "to insure that proper service was given to the growers of wheat and to merchants and millers and all other persons concerned in its marketing and disposal". 20 The BHA 1935 provided relevantly: · a grant to CBH (for twenty years) of the sole right to receive wheat in bulk at railway stations where it had installed country bins under the Act, and the sole right to contract or arrange for the handling, transport by rail and the delivery of wheat in bulk in the State (subject to certain minor exceptions) (section 3); · a requirement for Ministerial approval for the installation of bins and equipment, an obligation to maintain the bins and equipment to the Minister's satisfaction and to properly store the wheat received (sections 4, 6, 7 and 8); · an obligation on CBH to install, maintain and operate a country bin or other facilities for receiving and handling wheat in bulk at any railway station or siding which the Minister was satisfied had an average annual receival of in excess of 20,000 bushels of wheat (section 5); · a prohibition on CBH and its officers from trading in wheat (section 9); · a prohibition on CBH providing discriminatory or preferential treatment to persons using its facilities and services (section 11); · a requirement for any amendment to CBH's constituent documents to have express approval of the Governor (section 12); · a requirement for the company to in effect guarantee delivery of the grain or, in the event of a shortfall, to pay the warrant holder the market value of the grain delivered (section 16); · a requirement for CBH to insure wheat in its custody or under its control (section 17); · a requirement for CBH's financial statements to be tabled in Parliament and the power for the Auditor General to examine its books (section 18); · for the terms and conditions under which CBH was entitled to receive, handle, transport and deliver wheat to be as set out in Schedule 2 to the BHA1935, subject to variation by the Governor (section 20); · that title to the wheat remained in the hands of those entitled to obtain it from the bulk stocks held by CBH or under its control (section 21); · a requirement on CBH to accept delivery of wheat (subject to certain standards) (section 24); · an obligation upon growers to pay tolls and handling charges as determined by the Governor and the provision of a lien against wheat delivered in favour of CBH (sections 26 and 27); · a power for the Governor to make regulations in respect to the conduct and operations of CBH. 21 The BHA 1935 was amended from time to time. The effective monopoly granted to CBH to handle bulk wheat for 20 years was extended from time to time by Parliament. CBH also extended its operations to all grain handling including wheat, barley and oats. 22 In 1967, the BHA 1935 was repealed and replaced by the Bulk Handling Act 1967 (WA) (the BHA 1967). The monopoly was extended to 1985. 23 Prior to the year ending 31 October 1972, CBH was taxed as a co-operative under the relevant provisions of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936). In mid-March 1971 CBH submitted a draft of proposed amendments to the BHA 1967 to the Commissioner for consideration of whether these would, if enacted, mean that CBH would be exempt from income tax under the provisions of s 23(h) of the ITAA 1936. 24 The BHA 1967 was duly amended to that effect. Assent to the amendments was given on 13 September 1971. By letter dated 27 October 1971 the Commissioner advised CBH that it would be exempt from income tax on its income for the year ending 31 October 1972 and subsequent years. In the second reading speech on 18 August 1971, the Hon. W. F. Willesee, Leader of the House, stated the purpose of the Bulk Handling Act Amendment Bill: …the main purpose of this Bill is to release Co-operative Bulk Handling Limited from the obligation of paying taxation on surplus income. … As a consequence, the grain growers of this State - who are the shareholders - are advantaged in the superior service which they receive. 25 The amendments added section 35A to the BHA 1967 for the purpose of providing for the application of the income and property of CBH. By virtue of s 35A(a) no part of any income or property of CBH shall be paid or transferred as a profit, directly or indirectly, by way of dividend or bonus or otherwise, to any of its members. All the income and property of CBH is required by s 35A(b) of the BHA 1967 to be applied, subject to the Act, towards its objects as set out in cl 2 of its Memorandum of Association and not otherwise, being the establishment and maintenance of systems for handling of wheat and/or other grain. Its income includes amounts received from its subsidiaries. 26 In 2002, the BHA 1967 was substantially amended to remove a number of restrictive provisions and to facilitate the 'merger' of Grain Pool Pty Ltd into the CBH Group. Relevantly: · section 6 (the power of the Minister to require CBH to enter into a bond), section 8 (the prohibition on CBH engaging in the business of buying or selling or broking in grain), section 9 (the prohibition on CBH discriminating in terms and charges) and section 10 (the requirement for the Governor to approve alterations to the CBH Memorandum or Articles of Association) were repealed; · Part III (allowed the Minister to approve and direct the installation and maintenance of facilities) and Part IV (established the Shippers Delivery Board) were repealed; · the provisions enabling CBH to impose tolls were abolished, as the imposition of tolls ceased in 1999; · the requirement under s 34(1) for CBH's charges to be approved by the Governor by Order in Council was removed and replaced by a provision enabling the company's Board of Directors to approve charges; and · section 39 was repealed, as the sole right for CBH to receive and deliver grain had expired on 31 December 2000 and, for wheat, it had effectively expired following the introduction of the Wheat Marketing Act, 1989 (Commonwealth and State). 27 The current BHA 1967 is an "Act to make better provision for the bulk handling of grain by [CBH] …". It relevantly: · requires CBH to determine grades and publish standards for grain delivered (section 6A); · imposes an obligation on CBH to insure grain in its custody or control (section 11); · requires CBH to furnish financial accounts to the Minister for tabling in Parliament and authorises the Auditor General to examine the records of CBH (section 12 and Regulation 4); · authorises CBH to purchase its shares from any member (section 13); · requires that CBH pay amounts of any shortfalls of delivery of grain (section 16); · provides that CBH does not have title to grain, but in respect to grain is a custodian for reward (section 18); · requires CBH to allow use of its port facilities and equipment by any person on receipt of prescribed charges (section 19); · authorises CBH to impose charges for the handling, storage and delivery of grain, as fixed by the Board of Directors from time to time (section 34); · provides that CBH has a lien on grain held, in respect to its charges (section 35); · prohibits the distribution of income or property to any member and provides for its application otherwise (section 35A); · requires and authorises CBH to issue weighbridge tickets and warrants in respect to grain delivered (ss 36 and 37); · requires CBH to handle grain in accordance with the Act; to receive (subject to certain requirements) all grain tendered to it in bulk and to grade the grain tendered. It also provides for a guarantee of quantity and quality, authorises CBH to sell grain not delivered by 30 September in the following year, establishes the procedure for shippers to give notice to CBH; and establishes procedures for the sampling of grain and dispute resolution (Part VII); and · provides CBH with the right to receive and handle such seeds, other than wheat or barley, as the Minister may approve (section 52).

1996 Private Ruling 28 In 1996, there was some suggestion that the BHA 1967 would be repealed. Accordingly, CBH proposed amending its Articles of Association to incorporate provisions which would prevent the distribution of profits to its members, thus preserving the 'not for profit' status and tax exemption under s 23(h) of the ITAA 1936. 29 On 21 November 1996, an application was made to the Commissioner on behalf of CBH for a private ruling on whether or not CBH would continue to be exempt under s 23(h) of the ITAA 1936 if s 35A of the BHA 1967 was repealed and the proposed amendments were made to the Articles of Association. The Commissioner ruled that the income of CBH would continue to be exempt from income tax under s 23(h), in circumstances where: (a) the proposed amendments to the Memorandum and Articles of Association were formally adopted by the members; (b) the BHA 1967, or relevant parts thereof, was subsequently amended or repealed with the result that the current prohibition on distributions to members is no longer contained in the BHA 1967 or other legislation; and (c) the activities of CBH continue to satisfy the requirements of s 23(h) of the ITAA 1936.

30 Following the 1996 private ruling, the Articles of Association of CBHwere subsequently amended to incorporate relevantly clauses 110, 111 and 114 which are in terms similar to that of s 35A.

History of CBH 31 Since 1933 the area of Western Australia devoted to growing grain crops has increased by more than 380%. The annual tonnage of grain received by CBH in approximate figures has increased from 42,500 in 1933 to a high of 14.7 million in 2004. In 2008 it was 8.4 million tonnes. The number of points at which CBH receives grain from growers has increased from 5 in 1933 to a high of 334 in 1963. As at 2008 it was 152. The size of the wheat crop varies according to weather and price and is significantly affected by the success or failure of crops on marginal land. 32 CBH has not only increased the volume of grain crops handled by it, but it has also constructed, upgraded and maintained large grain export facilities at Esperance, Albany, Kwinana and Geraldton. It also established such facilities at Bunbury and Fremantle but these are now closed. In the 2005-2006 season these facilities shipped more than 12.5 million tonnes. The grains industry in Western Australia is export based, more so than in other States. Accordingly, the ability to ship grain to overseas markets efficiently is crucial to the industry's existence and the State's economy. 33 The Albany bulk handling facilities, known as the Albany Grain Terminal, were developed by CBH to facilitate the expected increase in grain crops being grown in the 'new lands' of the Great Southern area of Western Australia from the 1950's. Without those facilities, growers would have had to ship grain through Bunbury or Fremantle at considerable cost. In 1984 CBH spent $30 million on major extensions to the Terminal to cater for expected increases in grain from the area. Additionally with the anticipated advent of higher rainfall cropping and the introduction of different grains to the region the Terminal was designed to provide storage for an increasing number of grain segregations. Ten 10,000 tonne cells were designed to enable the use of fumigants and inert atmospheres including CO2 and N2 in the prevention of grain infestation. The development of controlled atmosphere technology as a method of pest control had already won CBH international recognition and allowed marketing authorities to offer Western Australian grain with minimal amounts of chemical residue. In 2006, CBH completed further extensions and developments to the Terminal at a cost of $130 million. It now has a capacity of 423,600 tonnes. At the time the anticipated cost of the upgrade did not meet the Board's hurdle rate of return for capital works and it anticipated that it would result in a negative net present value. 34 CBH constructed and maintains the Metro Grain Centre, a large innovative and modern bulk handling and distribution centre in Forrestfield near Perth. It has rail access and provides bulk handling facilities and storage for more than 65 types of grains and other primary product commodities. The Centre, opened in 1998, was built in part to replace the Fremantle facility to cater for the increasing segregation of crops required for international markets and to provide for modern and increasing grain hygiene standards required by international markets, as well as to service increasing demands of the domestic grain market. 35 CBH derives its income primarily from growers and others who utilise its services and facilities, by way of charges imposed upon the growers and other users including Grain Pool Pty Ltd, AWB Limited and other grain traders under the BHA 1967. The 'other users' account for a little over 50% of the gross revenue from charges imposed by CBH. 36 The charges are set by the Board of Directors of CBH who are authorised to do so under and subject to ss 34 and 34A of the BHA 1967. It has, unlike a normal trading company, had a history of setting its fees based upon concerns for grower and industry costs, while continuing to provide the services at the required level. Its fees and charges were not established to maximise its profit. CBH has also incurred expenditure, both capital and revenue, in establishing and maintaining unprofitable operations. In 2007-2008 CBH introduced a differential pricing regime for different receival points for the first time based upon the cost differential in maintaining the smaller sites which in effect produces a 'two tier' system. Nonetheless there remains considerable cross subsidisation of non-profitable receival depots and facilities. 37 Since its establishment CBH has encouraged and developed new technologies, both on farming properties and in its storage and handling facilities, in order to reduce industry costs and improve efficiency. 38 The statutory obligations of CBH to receive and handle all bulk grain tendered, to grade the grain delivered and to issue weighbridge tickets and warrants which evidence the grower's title, provides buyers and sellers with certainty of delivery of grain, both in quantity and quality. 39 In addition to its grain storage and handling activities, CBH undertakes research and development within the Australian grains industry directed to the development of new techniques, new infrastructure and improved grain quality. CBH spends millions of dollars on these projects, not all of which are successful. Improved grain quality yields a better reputation for the industry, easier marketing and higher prices for growers. Such activities include: Australian Grain Centre (a) the establishment in 2003 of the Australian Grains Centre, an accredited and sophisticated grain laboratory which undertakes grain testing and analysis in support of the industry nationally. It also performs a significant research and development role, primarily for the general benefit of the grains industry. It is not a project earning activity and the decision to establish the Centre was for the benefit of the grain industry generally; Infratec Machines (b) the development, in conjunction with a Swedish company, of Infratec machines which report grain colour, protein and moisture content, allowing grain marketers to determine and pay for quality grain measured on a load by load basis and to segregate grain in their respective markets. It has revolutionised the grain quality assessment process with this world-renowned and adopted sampling equipment; Quality Assurance Accreditation (c) the development of and support for International Standards within its own storage network. Approximately 50% of WA grain is now quality assured. This has been achieved at considerable cost to CBH and despite grower resistance. This has achieved a premium export price for quality assured grain. Without CBH's initiative and persistence, many international markets would have been lost to the Australian industry; Bio-security (d) research and development and improvement of methods to detect chemicals and contaminants in grain. Fast and rigorous analysis is conducted by CBH before grain is exported, reducing the risks and costs to growers and marketers of customer rejections and damage to the reputation of Western Australian grain; Image Analysis (e) current funding and developing of a grain image analysis method to act as an automatic sampler of most types of grain imperfections and quality. If successful this will reduce the incidence of human error thereby enhancing the reputation of Western Australian grain and providing more reliable information for marketers; Grain Caretaker Management (f) CBH has revolutionised the methods used for sealing and fumigating Australian grain storages to enable the safe and efficient use of Phospine to eradicate insects within the specially designed Open Bulk Head storages. Prior to these developments, Australian grain exports suffered ship rejections for insect infestation and high concentrations of chemicals. The investments by CBH in this development were significant and the developments made are now used throughout Australia. They have saved tens of millions of dollars for the Australian grains industry. Australian grain is now largely free of insects, chemicals and contaminants; Moisture Management (g) investment in new infrastructure and moisture monitoring techniques to allow for the delivery of grains with higher moisture contents into its storage facilities, so achieving reduced risk, increased harvest delivery patterns and improved quality, and a 21 day harvesting cycle making cropping viable for many growers who previously would have suffered significant losses in crops. These developments have encouraged the expansion and development of wetter areas in the State for cropping; and Cultivation and marketing of new grains (h) the promotion of the cultivation and marketing of new grains in Western Australia, including lupins (which add nitrogen to the soil and make new and previously unviable land, especially sandy soils, available for cultivation), new cultivars of barley (which are high yielding and suit the malting industry requirements), and canola (as a viable rotation crop, to break disease cycles with substantial benefits for the grain industry, and as a major crop throughout the wetter regions of WA). 40 CBH has also engaged in the following: Value Adding Facility (a) the establishment of a Value Adding Facility at the Metro Grain Centre at a costs to CBH in excess of $20 million, which deliberately operates at a loss but is designed to attract new entrants into the industry for the benefit of the growers of Western Australia. The VAF has provided additional stability to growers as marketing alternatives have increased; Genetically Modified Service Provision (b) the development, at its costs of technology which will allow, if the technology is accepted, the segregated collection and marketing of genetically modified crops in parallel to the existing supply chain; Maintenance of receival points (c) the upgrading and reconfiguration of bulk grain handling receival sites to accommodate the different harvesting characteristics in different areas and of different crops, a process which involves large capital outlays and the continued operation of sites at an operating loss; Containerisation Facilities (d) recent extensive investment in facilities to store and ship grain in containers thereby opening up new export markets; and Harvest Mass Management Scheme (e) the development (including changes in computer systems, policies, training and communications) of a Harvest Mass Management Scheme to manage the incidence of truck overloading between the farm-gate and CBH's weighbridges by providing a level of flexibility in load masses which will comply with proposed changes to the law regulating road use. 41 Further, CBH, in its application for private ruling set out a "Current Initiative" known as "Grain Express". It described this as follows: In 2008 the Federal Government introduced the new wheat exporting legislation that will provide qualifying entities with the ability to export wheat, removing the exclusive right previously held by AWB. This change will have a significant effect on the grain industry that had previously been structured around one exporter of wheat. Based upon its previous experience with the de-regulation of barley marketing, CBH (and the industry) has significant concern that there will be enormous additional supply chain costs to the grain industry arising from the de-regulation of wheat marketing. CBH has taken a lead role in trying to resolve this for the benefit of the industry generally. In anticipation of the complexity of managing the storage, handling and logistic requirements of a significant number of wheat exporters, CBH is in the process of re-engineering key fundamentals of its business. This new business model, referred to as Grain Express, is being refined in conjunction with key industry participants (the grain marketers, such as AWB, Cargills; the transporters such as ARG and the road transporters; and growers) to ensure that the supply chain efficiencies that have been historically achieved under the previous export arrangements will be maintained in the future. Grain Express will introduce a range of initiatives extending well beyond the "access regime" requirements contemplated in the new wheat exporting legislation and will, amongst other benefits, potentially avoid rail freight increases of between 20 and 45 percent. These savings in supply chain costs will ensure that the grain industry in Western Australia will be able to retain its competitive cost advantage in servicing the Asian and Middle East regions. This initiative has been encouraged by the State Government as a solution to an industry and governmental concern. The benefit from these proposed changes is to the industry generally. In fact, to leave the system as it is, would mean additional charges for growers and marketers and accordingly greater revenue for CBH. However this would increase the supply chain costs and reduce the competitiveness of Western Australian grain in the international market place.

Subsidiary companies and other investments 42 CBH has a number of subsidiary companies which carry on business in their own right. They are not tax-exempt. Each subsidiary is operated as a separate business to CBH, subject to some sharing of services for which arms length charges are made, with the directors of CBH appointed as directors of each of the subsidiary companies. Investment in the subsidiaries by CBH has been predominantly by way of equity and any profit or distribution from them to CBH is by way of dividend. These subsidiaries and investments in summary, as appears from the Commissioner's ruling, are: · Bulkwest Pty Ltd (100% ownership) - has 2 subsidiaries Bulkwest Engineering Pty Ltd (BWE) and Bulkwest Logistics Pty Ltd (BWL). BWE provides engineering, equipment and construction services to the grain industry and other bulk handling industries. The latter initially (non CBH) amounted to 34% but has fallen to 3% in 2004/2005. BWL was sold in late 2005 and it provided services to the grain industry, such as freight services, storage and warehouse facilities and the packaging and handling services for bulk products. From the year ended 31 October 2007 Australasian Lupin Processing Pty Ltd (ALP) has been operating as a subsidiary. ALP is a company owned in equal shares with George Weston Foods Ltd. It was established in 2004 and built a lupin de-hulling plant at Forrestfield. The object of the new value adding facility is to target new and expanded markets for WA lupins with a range of enhanced products which are produced by the plant. CBH funded this plant with a view to assist lupin growers find new markets and marketing opportunities for their crops. It is a high risk investment and without CBH funding probably would not have been built. · Grain Pool Pty Ltd (100% ownership) - specialist grain marketing organisation which supplies grain to both national and international markets. The Grain Pool was established in 1922 by the WA Government as the Wheat Pool. In 1962 the name was changed to the Grain Pool of W.A to reflect the broader range of grain marketed on behalf of growers. In 2002, the Grain Pool was converted into a company by the WA Government and the shares in the Grain Pool were transferred by the Government to CBH for nominal consideration. The Grain Pool markets around 3 million tonnes of grain each year for an annual turnover in excess of $800 million. The Grain Pool no longer holds a monopoly to export but holds the main licence to export WA barley, lupin and canola crops while also exporting various other pulses and cereals. In addition to providing grain marketing services, the Grain Pool provides technical assistance to growers in relation to crop production and undertakes research and development in relation to grain production. · Pacific Agrifoods (Investments) Pty Ltd (50% ownership April 2004) - which owns 4.687% of Futuris Corporation Limited which in turn owns Elders Ltd. · Pacific Agrifoods Ltd (50% ownership) - which wholly owns Interflour Holdings Ltd which directly owns or controls five flour mills, a grain terminal and grain purchasing entity in south east Asia. · CBH Global Ltd (100% ownership) - it is domiciled in Cyprus and wholly owns CBH Netherlands BV which owns 50% of the shares in an Indonesian flour mill. 43 CBH has invested in subsidiary companies and through these companies the CBH Group has expanded its operations to include other agriculture related activities, such as trading in grains (the Grain Pool) and the investment in other businesses, both domestically and internationally, which relate to the grain industry (BWL and the South East Asian Flour Mills). 44 The primary subsidiaries of CBH are Bulkwest Pty Ltd and the Grain Pool. The net asset position of other investments, primarily the South East Asian Flour Mills, amounts to $22.3 million. The investment in, and the net asset value of, the subsidiaries and other investments, compared to the total value of assets used by CBH in conducting the bulk handling operations is relatively small. In a normal year the dominant contributor to the CBH Group profits remains profit generated by CBH from the conduct of the bulk handling operations. For example the average contribution by CBH to the CBH Group over the five years from November 2002, since its acquisition of the Grain Pool, is as follows: CBH $000 Revenue 270,031 Net Profit Before Tax 57,784 CBH Group (Consolidated) Revenue 572,054 Net Profit Before Tax 82,159

45 CBH provides on average 47% of CBH Group revenue and 70% of CBH Group net profit before tax. The reason for the lower percentage of contribution to revenue compared to net profit is that the Grain Pool is a grain trader. As a consequence, it has high revenue but also it has a commensurately high cost of goods sold which is grain purchased for sale.

Exempt entity status 46 I respectfully agree with the view expressed by Edmonds J in Commissioner of Taxation v Bargwanna [2009] FCA 620 at [28] that income tax exemption status requires strict adherence to the statutory requirements before that status is conferred. The statutory conditions that the applicant must meet before being entitled to exemption from income tax are set out in s 50-1 and s 50-40 of the ITAA 1997 as follows: 50‑1 Entities whose ordinary income and statutory income is exempt The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions. 50‑40 Primary and secondary resources, and tourism Primary and secondary resources, and tourism Item Exempt entity Special conditions 8.2 a society or association established for the purpose of promoting the development of any of the following Australian resources: not carried on for the profit or gain of its individual members (a) agricultural resources; (b) horticultural resources; (c) industrial resources; (d) manufacturing resources; (e) pastoral resources; (f) viticultural resources; (g) aquacultural resources; (h) fishing resources

Society or association 47 CBH was incorporated in 1933 and is a cooperative company incorporated under and regulated by the Companies (Cooperative) Act 1943 (WA) and the BHA1967. The Commissioner does not dispute, correctly in my opinion, that CBH is a "society or association."

Australian agricultural resources 48 The Commissioner contends that bulk handling facilities, whether in receiving, transporting, storing or loading grain, are not Australian agricultural resources within the meaning of s 50-40. Further, he contends that the grain and legumes produced by agriculture are not themselves Australian agricultural resources within the meaning of s 50-40, but rather it is the land and its capacity applied to agriculture, in the relevant parts of Western Australia that constitute Australian agricultural resources within the meaning of the section. This contention of course is at odds with the view taken by the Commissioner for nearly forty years. Counsel for the Commissioner declined an invitation to explain why this was so. 49 The Commissioner submits that while the words must be interpreted in context, the ordinary meaning of 'agriculture' has been interpreted as the cultivation of the land to produce crops and the getting in or harvesting of those crops, and that this has been held to be separate and distinct from the subsequent treatment of the crops whether in transporting, distribution, marketing or processing, which are not agricultural pursuits. The Commissioner cites generally the following cases in support: The Producers' Co-operative Distributing Society Limited v Commissioner of Taxation (NSW) (1947) 75 CLR 134; G Gramp & Sons Limited v Commissioner of Taxation (1965) 115 CLR 170; Australian National Railways Commission v Collector of Customs South Australia (1985) 8 FCR 264; Proserpine Co-operative Sugar Milling Association v Deputy Commissioner of Taxation (1996) 34 ATR 129.

50 In The Producers' Co-operative Distributing Society Limited the relevant expression under consideration was "agricultural products" found in s 19(o) of the Income Tax Management Act 1941 (NSW)which in turn incorporated the meaning given to that expression by s 5 of the Co-operative Act 1923-1941 (NSW). That definition meant 'products of any rural industry'. 'Rural industry' was defined to mean "the cultivation or use of land for any agricultural, pastoral, dairying, or rural purpose".

51 G Gramp & Sons Limited concerned depreciation allowances and, relevantly, the proper construction of the phrase 'agricultural pursuits' as employed in s 57AA of the Income Tax and Social Services Contribution Assessment Act 1936-1960 (Cth).

52 Australian National Railways Commission involved a consideration of s 78A of the Excise Act 1901 (Cth), which provided that a rebate of excise is payable to a person who purchases diesel fuel for use by him in mining operations or primary production. The applicable definition of "primary production" incorporated from s 164 of the Customs Act 1901 (Cth) includes "agriculture" which in turn is defined as the cultivation of the soil, the cultivation or gathering in of crops and the rearing of livestock, together with other operations (including disease control) connected therewith.

53 Proserpine Co-operative Sugar Milling Association considered whether a cane inspector's vehicle was exempt from sales tax under para (a) of Item 3 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Cth). The relevant question was whether for the purposes of that provision the vehicle was used by a person mainly in carrying out activities in "agricultural industry". The term "agriculture" was defined to include: (a) viticulture, horticulture, pasturage, apiculture, poultry farming and dairy farming; (b) other operations connected with the cultivation of the soil, the gathering in of crops and the rearing of livestock. 54 In my opinion, none of these cases assists in the resolution of this case. Each turns on the proper construction of various composite terms found in the particular legislation under consideration and their application to the facts in the particular case. As Windeyer J said in G Gramp & Sons Limited at pp 174-175 the resolution of the case before him depended upon the application of the statutory provisions in question to its facts, not upon the bearing of another statute upon different facts. Such is the case here. 55 CBH submits that the aggregate industry or activities of Western Australian grain producers are an Australian agricultural resource within the meaning of Item 8.2 of s 50-40, just as the aggregate activities of Australian insurance companies are a resource of Australia, as held in Australian Insurance Association v Federal Commissioner of Taxation (1979) 41 FLR 256. That was a case dealing with s 23(h) of the ITAA 1936. 56 However, the Commissioner submits that Australian Insurance Association (1979) 41 FLR 256, properly understood, makes it clear that the heads of Australian resources identified in Item 8.2 of s 50-40 are not to be given a wide or overlapping meaning and accordingly bulk handling facilities and operations, whether in receiving, transporting, storing or loading bulk grain (and legumes), are not 'agricultural resources' of Australia. In my view this case does not stand as authority for this broad proposition. It was concerned with the meaning of "industrial resources" and whether that expression extended to business and commercial resources. The members of the Australian Insurance Association were the Australian general insurance companies carrying on business in Australia. The primary question was whether the undertakings of those companies, including their businesses, assets, and the knowledge and skill of their staff constituted an Australian industrial resource for the purposes of s 23(h). Sheppard J had no difficulty in concluding that, viewed as a whole, these undertakings comprised an Australian resource but not an Australian "industrial" resource. 57 As his Honour said at 262-264: … It is a question of ascertaining what the expression "industrial resources" was intended to mean in the section which is under consideration. … There is a degree of specificity in the words used in the section. It refers to aviation, then to four resources of primary industry, then to manufacturing and finally to industrial resources. The use of these various expressions does not suggest that the draftsman intended to give to the word "industrial" any wide meaning intended to embrace business or commercial resources. If it had been intended to do so, it would have been quite unnecessary to use the word "manufacturing" or to be as specific in relation to the primary industry resources which are mentioned. … In a provision which refers specifically to agricultural and pastoral resources it might have been expected that the draftsman, if he had intended the expression to be as wide as is contended for by the appellant, would have used a further additional word with a well-known meaning to make his intention clear. The fact that he has not leads to the conclusion that he did not intend to include resources of the kind promoted by the appellant's principal activities to be within the benefit of the provision which is in question. 58 The Commissioner's submission, in effect, is that the "development of agricultural resources" is confined to the farm side of the "farm gate", but cannot extend, beyond the "farm gate" to the receiving, handling, storage and transporting of grains grown on farms. 59 I do not accept the "farm gate" argument. It is unduly narrow. The expression "agricultural resources" is wider than the word "agriculture" and extends beyond "land" which is cultivated to produce crops of grains. Section 50-40 at Item 8.2, in this context, could have been limited by the Parliament to the "development of agriculture" or the "development of agricultural land" but it was not. 60 The word "resources" is important and requires to be given meaning as qualified by the adjective "agricultural". A court construing a statutory provision must strive to give meaning to every word of the provision: The Commonwealth v Baume (1905) 2 CLR 405 at 414 per Griffith CJ; at 419 per O'Connor J; Chu Kheng Lim v Minister for Immigration Local Government & Ethnic Affairs (1992) 176 CLR 1 at 12-13 per Mason CJ. This approach was reiterated in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [71] by McHugh, Gummow, Kirby and Hayne JJ. 61 Whilst consideration must be given to every word it must be remembered that it is the words in combination which ultimately must be construed. The following passage by Tamberlin J, with which I respectfully agree, in Visa International Service Association v Reserve Bank of Australia (2003) 131 FCR 300 at [293] is instructive: In interpreting the definition of "payment system" it is also important to bear in mind that an unduly analytical approach in the sense of analysing each word separately and then seeking to reconstruct the terms used by reference to the definitions can often lead to an artificial interpretation. It is necessary to bear in mind that the definition is a collocation of words selected as a whole and that sense must be given to the expressions read together as an entirety rather than to individual words added to each other: cf Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 at 398-401. To similar effect is the observation by Learned Hand J in Helvering v Gregory (1934) 69 F (2d) 809 at 810-811, where his Honour states, with elegance and precision, that: … the meaning of a sentence may be more than that of separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create. 62 The following seem to be the most apt dictionary definitions of the words "agriculture" and "resources".

Macquarie - "the cultivation of land, including crop-raising, forestry, stock-raising, etc.; farming". Shorter Oxford - "The science or practice of cultivating the soil and rearing animals; farming". · 'resource'

Macquarie - "1. a source of supply, support, or aid; 3. the collective wealth of a country, or its means of producing wealth; 4. assets". Shorter Oxford - "1a. A means of supplying a deficiency, a stock or reserve which can be drawn on when necessary; available assets; - b. The collective means possessed by a country for its own support". 63 According to the Shorter Oxford the adjective "agricultural" means "of or pertaining to agriculture". 64 The predominant, almost sole, subject matter of CBH's activities is grain of various types: mainly wheat, but also barley, oats, canola and lupins. It handles almost all of the wheat crop of Western Australia, representing on average some 40% of the total Australian wheat crop. In my opinion, wheat, and the other grains which are the product of agriculture and the means by which these are transported, stored and loaded by CBH outside the "farm gate" form part of the collective wealth and assets of Australia or the means by which such wealth and assets are produced and are included within the expression "Australian agricultural resources" in s 50-40, Item 8.2. It would be artificial, in my opinion, to distinguish the product of agriculture and the means by which it is handled in bulk for marketing outside the "farm gate" from either the land from which it is produced or the activities of planting, growing and harvesting grains, inside the "farm gate" when considering what constitutes Australia's agricultural resources. In other words, as CBH puts it, the capacity, variously, to produce and deliver grain for consumption and export is an agricultural resource of Australia.

Purpose of promoting development 65 Section 50-40, Item 8.2, concerns, relevantly an association established for the purpose of promoting the development of Australian agricultural resources. The purpose must be the principal, dominant or main purpose for which the association was established: Australian Insurance Association v Federal Commissioner of Taxation at 266; Cronulla Sutherland Leagues Club Limited v Commissioner of Taxation (1990) 23 FCR 82 at 96 per Lockhart J, 117 per Beaumont J. 66 However, as Lockhart J said in Cronulla at 89: Section 23(g)(iii) is concerned with the periodic or recurrent, not the static, with the purposes of the relevant body in the year of income. It is relevant, however, to look at the objects or purposes for which the body was incorporated including the objects clauses in the memorandum of association, also any subsequent activities of the body which may throw light on its activities in the relevant year of income. A society, association or club is not a stationary entity. It may change its activities and perhaps its purposes during its life which together make up the body itself and enable the questions posed by the subparagraph to be answered in the year of income, namely, the identification of the objects or purposes for which the body is established. And then at 95-96: In my opinion the question in a case such as the present must be what is the true character and nature of the appellant. It is a question of characterising the appellant having regard to its objects, purposes and activities. … The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at the time the purpose of its formation. The statute gives a periodic operation to the words and directs the enquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted. 67 This approach to the proper construction of the legislation was later reflected in Commissioner of Taxation v Word Investments Ltd (2008) 236 CLR 204 at [34] per Gummow, Hayne, Heydon and Crennan JJ. Their Honours said: [P]rovisions in the legislation exempting tax on annual income, have "a periodic operation"; the statute "directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the [institution] was established but also the purpose for which it is currently conducted. 68 Section 50-40 does not require that CBH is "established" expressly to promote the development of Australian agricultural resources, but, that this, in fact be that purpose. If the facts comprising the scheme disclose, objectively, that the requisite purpose is the principal or dominant purpose of CBH, the requirement is satisfied. 69 Speaking of charitable purposes rather than those in s 50-40, but drawing on authority extending to the antecedents of the present section, the High Court, in Word Investments Ltd at [38], said that "the charitable purposes of a company can be found in a purpose of bringing about the natural and probable consequence of its immediate and expressed purposes, and its charitable activities can be found in the natural and probable consequence of its immediate activities." This reflected the observations of MacDermott J in Baptist Union of Ireland (Northern) Corporation Ltd v Commissioners of Inland Revenue (1945) 26 TC 335 at 348 that "the charitable purpose of a trust is often, and perhaps more often than not, to be found in the natural and probable consequences of the trust rather than in its immediate and expressed objects". 70 Accordingly, while the statements of an association are not to be disregarded, they are not decisive of its principal or dominant purpose. The absence of a purpose expressed in the language of s 50-40 is not determinative that the requisite statutory purpose is absent. 71 The requirement of the section is that the association should be "established," that is, conduct its activities "for the purpose of promoting the development of … Australian … agricultural resources." This is a question of objective fact. 72 Accordingly, the authorities broadly establish that, in identifying the relevant purpose in this provision: (a) the purposes expressed in the constitutive documents in the formation of the association are relevant but not determinative; (b) the section is concerned with the "periodic or recurrent" purposes of the body in the relevant years of income; (c) the association must be established principally or predominantly for the relevant purpose, and an incidental purpose will not suffice; (d) other relevant facts for consideration will include the association's activities, its history and its control. 73 The Commissioner submits that the principal or dominant purpose of CBH is not to promote the development of Australian agricultural resources. He says that CBH was founded as a member co-operative business to implement and operate bulk handling in the receiving, transport, storage and loading of grain in Western Australia: trading with and for its members and for their benefit. It was, he submits, able to pay dividends and its Memorandum of Association at clause 4 retains this feature, including a special provision that it can pay dividends in respect of three preceding financial years in which no dividends were paid. 74 The background to this submission is that prior to the amendments introduced by the Bulk Handling Amendment Act 2002 (WA), shares were automatically issued to growers delivering grain to CBH for a nominal set amount. Growers who had not made sufficient deliveries over recent years ceased to be entitled to hold shares. After the amendments, growers delivering grain to CBH continued to be entitled to subscribe for shares for a nominal set amount but were no longer issued shares automatically. Shares continue to be held only by growers who have made sufficient deliveries over recent years. Some 89% of grain growers in Western Australia are members of CBH and those members deliver 95% of the grain delivered to CBH. 75 The Commissioner points up the following facts. CBH receives, transports, stores and loads grain as well as legumes. Its storage is not limited to grain it has received at remote receiving points and transported. Its loading is not limited to grain it has stored. It deals in grain of various kinds and to various specifications. It carries on other business activities. It has substantial investments in other entities. These companies all have operations connected in some way with grain, including as end users of grain. The main examples of these are set out under [42] above. All of these, the Commissioner submits, are commercial operations which maximise the commercial value of CBH to its shareholders who now deliver 95% of its grain handling business. 76 The Commissioner then submits that, where the CBH controls the activities of other entities, its purposes might be identified by taking into account the control it exercises over those activities and that in any event, its purposes must take account of profitable investment as an object in itself. The relevant scheme, according to the Commissioner, shows that activities of companies in which CBH has invested have some relationship to grain industry, such as in operation of flour mills, but the scheme also shows that CBH does not control the activities of those companies so as to make them advance the development of relevant Australian agricultural resources. The Commissioner submits, for instance, that the relevant scheme shows no basis on which it could be suggested that Indonesian flour mill investments are required to take, or to prefer, Western Australian grain at all and certainly not to take Western Australian grain on terms conducive to development of Australian agricultural resources. 77 Next the Commissioner submits that the documents which govern CBH's operations, its Memorandum of Association and the BHA 1967 forming part of the relevant scheme, do not disclose an express purpose at any time since the founding of CBH of promoting the development of Australian agricultural resources. Those documents he submits are all directed solely at enabling CBH to provide an efficient grain bulk handling system to its shareholders and other users operating on a purely commercial basis. 78 The history and activities of CBH over time demonstrate, according to the Commissioner, that its predominant purpose is to conduct a grain handling operation by providing grain handling services to its members and other users so as to maximise the value of the operation for its members. Its operations and investments are determined only by its commercial interest. The Commissioner contends that limiting activity to the most profitable, on commercial grounds is not development and does not satisfy s 50-40 although it does describe substantial aspects of CBH's activity in the relevant period. 79 Further the Commissioner submits that CBH has failed to establish how its activity including conducting grain handling operations promotes the development of a relevant Australian resource within the ordinary meaning of those words in Item 8.2 of s 50-40. 80 The Commissioner submits that "promoting the development" of resources is not conducting and maintaining ongoing business operations or making "provision for the better continuation of those business operations". Rather it entails "unlocking, exploiting or bringing out the inherent potentialities and latent capabilities" of agricultural resources and the advancement of agricultural resources. I accept the latter statement as an apt definition. It broadly reflects the meaning attributed by Kitto J in Federal Commissioner of Taxation v Broken Hill Proprietary Company (1969) 120 CLR 240 at p 247 to the word "development" within the phrase "development of a mining property" for the purposes of s 122 of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth). This definition appears to have been adopted by the Full Court on Appeal. 81 The Commissioner submits that the question is not resolved by identifying the purpose for which CBH was established at its foundation - the facts show CBH's purpose was not and could not then be regarded as development of Western Australian agriculture, with bulk handling and other activities to be pursued only as a means of implementing that purpose. Rather, the Commissioner submits, the scheme discloses that development of agricultural resources was an objective of the State of Western Australia in the early years of CBH's operations, and that it was subject to potential directions requiring it to support the development proposals of the State had it chosen to act in ways unsatisfactory to the State. At foundation, the question of whether a bulk handling business would be helpful to the Western Australian grain industry and consistent with the development objectives of the State led to a Royal Commission. Because the Royal Commission was essentially favourable as to the effect of bulk handling, the State enacted legislation supporting CBH including with limited monopolies on receiving bulk grain in remote areas, and enabling some areas of direction of CBH. The Commissioner argues, accordingly, that the purpose of development of Western Australian agriculture was that of the State, not of CBH. 82 The Commissioner extends this particular submission to the history of grain terminal facilities. Over many years, CBH extended the availability of receiving points for grains as well as legumes and introduced bulk loading facilities to additional ports. Where CBH has established new grain terminal facilities such as at Kwinana and Albany, it has done so in response to development of Western Australian agriculture. The Commissioner submits that such extension of its operations may have met the development objectives of the State but nothing in the scheme discloses that development was an objective of CBH, which so far as the facts contained in the scheme disclose has always been conducted solely with the objective of developing the commerciality of its own business and operating in the most commercially effective way possible. 83 More recent changes to CBH's activities have involved progressive removal of receiving points in less commercially profitable areas and the introduction of differential pricing. These changes, says the Commissioner have reflected a purely commercial purpose and have not been motivated by, or controlled by reference to, any purpose of development. He contends that for many years now, including the period in issue, the facts contained in the scheme disclose no situation in which the objective of development of grain (or legume) growing resources has led to an expansion in the availability of its receiving, transport, storage or loading activities. On the contrary, he submits that the facts disclose that commercial objectives have led to the restriction and withdrawal of its services from less economic areas and to the introduction of two-tier charging. 84 The Commissioner accepts that providing bulk handling when there was no such operation promoted development in early years, but says that this effect has long ceased. The relevant scheme discloses that innovation of storing, handling and transporting grains in bulk had taken over from bagged grain by 1943. The BHA 1967 updated regulation of bulk handling to the changed environment in which CBH then operated. Bulk handling, according to the Commissioner, is now a 'mature' business provided not only by CBH but by competitors operating, like CBH, only to carry on grain business in the most commercially effective way. 85 He contends that any development effect is no more than incidental, if there is any such effect of the present establishment of CBH, and that such incidental effect cannot satisfy the requirements of s 50-40 citing Boating Industries Association of New South Wales v Commissioner of Taxation (1985) 75 FLR 467. CBH's activity of bulk grain handling, he submits, does not have the purpose of promoting the development of the cultivation of land. 86 The Commissioner submits that creating efficiencies in its bulk handling operations may promote and maximise the value of its bulk handling services to its shareholders and other users, just as the efficient operation of any business may promote and maximise its value to its shareholders and customers, but that this does not amount to any predominant purpose of promoting the development of Australian agricultural resources. He further contends that to the extent it might be argued that, by expanding the capacity of CBH's bulk handling and generating efficiencies in its bulk handling methods such as the Metropolitan Grain Centre, the Albany terminal upgrade and Grain Express, it has encouraged or facilitated the opening up of new agricultural land for grain cultivation or the more intensive and diverse cultivation of developed land, these were no more than consequential, ancillary or incidental effects. Nor, the Commissioner says, do such effects in the past suggest that CBH is established with such a predominant purpose in the period now in issue. 87 Accordingly the Commissioner's collective submissions on 'purpose' argue variously that the activities of CBH are carried on with the predominant object or purpose of maximising commercial profit for the benefit of its members. This includes CBH's investments in other companies. 88 I am satisfied for the following reasons that the principal, dominant or main purpose of CBH was and remains to promote the development of Australian agricultural resources by promoting the development of the grain growing industry of Western Australia. 89 I have already concluded, contrary to the Commissioner's submissions that both the grain harvested from the land and the means by which it is transported, stored and loaded in bulk for consumption and export form part of Australia's agricultural resources. It follows that I do not accept his submission that 'development', in the present context, can relate only to land and its capacity applied to agriculture. 90 The following are the most apt definitions of "promoting" and "development": · 'promoting' Macquarie - "2. to further the growth, development, progress, etc., of; encourage". Shorter Oxford - "(a) that which promotes - 2. Further the development, progress, or establishment of (a thing); encourage, help forward, or support actively (a cause, process etc)". · 'development' Macquarie - "1. the act, process or result of developing, 3. evolution, growth, expansion. Shorter Oxford - "the action or process of developing; evolution, growth, maturation; a stage of advancement, an addition, an elaboration. Develop - bring out all that is potentially contained in, cause to grow or mature, evolve, cause to come into existence or operation; convert land to new use, so as to realise its potentialities". 91 From its establishment, the main objects of CBH in paragraphs (a) and (b) of its Memorandum of Association, were to "establish maintain and conduct any schemes or systems for handling of wheat and/or other grain in bulk or otherwise [and] to receive handle transport grade classify and store wheat and/or other grain." 92 Without bulk handling such as was provided by CBH, the Western Australian wheat farming industry may well have collapsed. The task and control of the handling of bulk wheat was granted by statute to CBH, rather than a government body as in other States at that time because CBH had already been established for that purpose by Westralian Farmers Ltd and to create a new governmental board would have been wasteful. I accept that, in taking this course, it was the purpose of the State of Western Australia to promote the development of Australian agricultural resources. This does not mean that within the meaning of s 50-40 this could not also be CBH's purpose. 93 I reject the Commissioner's submission that CBH conducts its activities principally for the commercial benefit of its members. The facts, evident in the scheme considered by the Commissioner, do not support such a conclusion, nor do they support his submissions that the CBH limits its activities to those most profitable on commercial grounds. The relevant facts are set out under [31]-[45] above. It is evident from these that CBH deliberately engages in a number of important activities at a loss and, at least in relation to Quality Assurance Accreditation, has done so even in the face of resistance from growers, many of whom are members of CBH. Its fees are generally based upon concerns for grower and industry costs while continuing to provide services at the required level and not to maximise its profit. 94 Section 35A(a) of the BHA 1967 prohibits CBH from paying or transferring any part of its income or property as profit by way of dividend, bonus or otherwise to any of its members. By s 35(b) all income and property of CBH are required to be applied towards its objects as set out in cl 2 of its Memorandum of Association. Under s 35A(e) any surplus assets upon a winding-up must be applied as directed by the WA Treasurer. CBH is also precluded, in my opinion, upon the proper construction of its Constitution, read as a whole, from so doing. I will deal with this in greater detail below. 95 I agree with the submission put on behalf of CBH that its over all activities benefit not only growers, who are CBH members but also growers who are not members and who pay for the services provided by CBH at the same rate as members. Its activities also benefit grain traders, millers and the State generally. This is entirely consistent with the preamble to the BHA 1935 which described, as an object of that Act, that "proper service (be) given to the growers of wheat and to merchants and millers and all other persons concerned in its marketing and disposal". The preamble to the BHA 1967 is rather more general in its expression. 96 Moreover, I accept the submission of CBH that the negative qualification expressed in the third column in s 50-40 "not carried on for the profit or gain of its individual members" is not to be imported into the construction of the positive criterion in the second column ("established for the purpose of promoting …"). If it were, the special condition in the third column would be redundant. The positive criterion under the second column requires discrete consideration. The question is whether the promotion purpose is the main purpose for which the entity is established. That members of CBH who are involved in commercial activities related to Australian agricultural resources benefit from what CBH does to promote the development of those resources, does not deprive CBH from being characterised as being carried on principally or predominantly for the purpose of promoting such development. Indeed, the successful development of those resources will ordinarily have the result that participants in it will thereby be benefited. As I have explained, any entity established to develop any of the resources identified in Item 8.2 is likely to be supported by, and to include in its members, participants involved in commercial activities related to those resources. So far as the activities of CBH benefit growers who are members, those growers are benefited in their capacity as growers and to the extent that they use the CBH services and not because they are members. That the members, as such participants, benefit from the entity's activity does not deny it from having the principal or dominant purpose of promoting the relevant purpose. I will revisit later the question of such benefits and whether or not they constitute profit or gain for individual members. 97 The principal or predominant activities of the CBH, including its involvement through subsidiaries and other investments to which I have referred, help to render growers, traders, millers and exporters more competitive in what is largely an export driven market. In so doing this necessarily promotes the development of Australian agricultural resources. 98 I do not think it correct to characterise CBH, as the Commissioner does, as a mature business for the carrying on of a grain handling business in the most commercially effective way. This view either ignores or minimises the very significant advances made by CBH which I have set out at [39]-[41] above and which do not accord with the Commissioner's characterisation. I do not accept the Commissioner's submissions that if such activities do promote the development of agricultural resources in Australia then they are merely consequential or incidental. These developments are neither of these. CBH could store grains without being involved in any research and development of those kinds. These activities, it seems to me, are discrete in their nature from the activity of bulk handling. That they have been and continue to be undertaken by CBH necessarily enhances the reputation of Australian wheat grown in Western Australia and thereby advances this country's competitiveness in the grain export market. 99 These are, on their face, very important and significant activities of CBH, both quantitively and qualitatively, which have contributed to the development of Australian agricultural resources. 100 If the Commissioner intends, by describing CBH's business as "mature", to mean one which has plateaued or reached a static state then the facts before him did not bear this out. I accept CBH's submission that with the advent of new markets, new crops, new lands, new technology, new regulations and new methods the challenges facing CBH are, as evidenced by its long history and its current and proposed activities, evolutionary in character and so its business is continually open to development by advancement.

The special condition for exemption 101 Even if CBH is established for the purpose of promoting the development of Australian agricultural resources, it still requires, in order to constitute an entity exempt from income tax, also to meet the special condition in Item 8.2 of s 50-40, that it is: "not carried on for the profit or gain of its individual members". 102 The Commissioner submits that in order to meet this special condition the constituent documents and any governing legislation of the entity must prevent it from ever distributing profits or assets for the benefit of members and the organisation must act in accordance with those governing clauses. 103 The special condition, however, is not satisfied, according to the Commissioner, merely by pointing to the existence of clauses prohibiting distributions to members in the entity's constituent documents and any governing legislation. Rather, he submits, the word "gain" may be distinguished from quantifiable and distributable profits and that it can mean benefit and advancement and other means of obtaining value citing Mersey Docks and Harbour Board v Lucas (1883) 8 App Cas 891 at 905. 104 The Commissioner submits that the special condition requires an objective conclusion to be drawn from the operations of the entity as to whether it is carried on for profit and gain and for whose profit and gain. 105 The Commissioner contends that the special condition precludes the exemption of CBH as the relevant scheme shows that CBH was founded as a grower co-operative business of and for its members, and its activities and investments have expanded progressively on this business basis. The Commissioner refers in support to clause 4 of the Memorandum of Association which, he argues, provides for the distribution of dividends to current members and on certain conditions to members from previous years. 106 Clause 4 is in these terms: Before declaring a dividend out of the profits for the then last financial year of the Company the Directors may in their discretion provide for the payment of a dividend upon the shares which had been issued and were held by shareholders during any one or more of the three preceding financial years in respect of which no dividend has been declared PROVIDED THAT such dividend shall be payable to the persons registered as the owners of such shares at the date of the declaration of such dividend. 107 On the other hand, the Articles of Association of CBH at articles 110, 111 and 114 are as follows: "INCOME AND PROPERTY 110. No part of any income or property of the Company shall be, directly or indirectly, paid or transferred as a profit, by way of a dividend or bonus or otherwise, to any shareholder. 111. All the income and property of the Company shall be applied towards the objects of the Company as set out in the Memorandum of Association and not otherwise. 114. If the Company is wound up and any surplus assets remain after payment of its debts and liabilities and the costs of winding up and repaying to shareholders the capital paid upon those shares, those surplus assets shall not be distributed amongst the shareholders, but shall be distributed or applied in such other manner as shall be determined by the liquidator, subject to prior confirmation from the Commissioner of Taxation that the distribution complies with the requirements of section 23(h) of the Income Tax Assessment Act 1936, or the equivalent section or sections in the then prevailing income tax legislation. 108 More importantly, by s 35A of the BHA 1967, distributions of profits or property among members are prohibited. The section is relevantly in the following terms: Part VA - Application of income and property 35A. Manner of applying income and property of the Company Notwithstanding any of the provisions of the Companies (Co-operative) Act 1943 or of the memorandum or articles of association of the Company - (a) no part of any income or property of the Company shall be, directly or indirectly, paid or transferred as a profit, by way of a dividend or bonus or otherwise, to any member of the Company; (b) all the income and property of the Company shall be applied, subject to this Act, towards the objects of the Company as set out in clause 2 of its memorandum of association and not otherwise; … (e) if the Company is wound up and any surplus assets remain after payment of its debts and liabilities and the costs of the winding up and repaying to shareholders the capital paid upon their shares, those surplus assets shall not be distributed among the members of the Company but shall be distributed or applied in such other manner as shall be directed by the Treasurer of the State acting for and on behalf of the State. (Emphasis added) 109 As a matter of history both the provisions of the BHA 1967 and those of the Memorandum and Articles of Association were framed as they are in order to secure the past agreement of the Commissioner that the requirement that CBH not be carried on for the profit or gain of its individual members was satisfied. 110 The Commissioner submits that notwithstanding the apparent inconsistencies between clause 4 on the one hand, and clauses 110, 111 and 114 of the Memorandum of Association and s 35A of the BHA 1967 on the other, ultimately they might not be interpreted to preclude distributions to members. 111 In any event these provisions, he argues, do not preclude distribution to or among members, but do no more than make such distribution on winding up dependent on the decision of the State minister, and that accordingly CBH is not presently effectively precluded from distribution to or among its members. 112 This is so, says the Commissioner, because, absent an effective prohibition on ever distributing to members, the purposes of a body would be open to accumulate gains and later distribute them to members and that clauses can never be absolutely effective even to preclude this, because they could be subject to later change. 113 Furthermore, the Commissioner contends it is difficult to be satisfied that a body without non-distribution requirements is not carried on for the profit or gain of its member and that it does not follow in law or in fact that a body subject to non-distribution requirements is not carried on for the profit or gain of its members. 114 The Commissioner's case is that CBH's activities are carried on for the profit or gain of its members and is demonstrated by the following considerations. The history of CBH is that it was formed for the purpose of providing its members with a bulk handling system to reduce the costs of handling their grain which continues as its core and primary purpose. CBH also provides 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. There is identity between those who gain from CBH's activities and those entitled to become members of CBH. Whilst those who deliver grain to CBH do not automatically become members, they may do so for a fixed and essentially nominal subscription. CBH has a statutory obligation to receive grain from members and non-members, who pay the same for some of the services provided, non-member use of services is minor in comparison to member use of services. Nearly 90% of growers are members of CBH. The profit or gain it provides by the terms on which it accepts delivery of grain is actually provided mainly to members, who deliver some 95% of grain CBH handles. All its other operations are conducted on a purely commercial basis and provide substantial assets and income to CBH, which flow essentially into the terms on which it accepts delivery of grain and thus overwhelmingly to members. 115 The Commissioner contends that bodies can be carried on for profit or gain of their individual members other than by way of distribution from the body, as CBH unarguably was at all times up to the introduction of non-distribution clauses. He submits CBH was able to pay dividends but instead applied as its strategy the minimisation of its charges so as to maximise returns to growers and that many co-operative businesses continue to apply this strategy in carrying on business for the profit or gain of their members. 116 In my opinion, for the following reasons, the activities of CBH are not carried on for the profit or gain of its individual members. The special condition is accordingly satisfied. 117 The qualification in s 50-40 of the ITAA 1997 does not one preclude any benefit to members. Rather, it is that the activities of CBH should be "not carried on for the profit or gain of its individual members." As Barwick CJ said (McTiernan, Windeyer and Owen JJ agreeing) of an earlier and essentially identical statutory provision in Commissioner of Taxation v Cappid Pty Ltd (1971) 127 CLR 140 at p 153: Section 23(g) exempts from tax the income of certain bodies which are not carried on for the purposes of profit or gain to their individual members. The concept in this provision is of bodies, either corporate or unincorporated which are carried on for the benefit of their members but not for the profit or gain of their members severally or individually. 118 I do not regard anything said in Mersey Docks and Harbour Board v Lucas as to the meaning of "profits" and "gains" under the Income Tax Act 1842 (U.K) and upon which the respondent relies as detracting from the persuasive force of Cappid. 119 I accept the submission of CBH that an association is not carried on for the profit or gain of its individual members if 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. In Theosophical Foundation Pty Ltd v Commissioner of Land Tax (1996) 67 SR (NSW) 70 at 85 Sugarman JA considering a requirement that a society be "not carried on for pecuniary profit," meaning not for the pecuniary profit of individuals, said that its "object is to accord exemption to those societies, clubs and associations, and institutions and bodies of various kinds, whose profits, if any, are applied solely to the advancement of their objects and cannot find their way into the pockets of individuals." This approach was followed in Crows Nest Club Ltd v Commissioner of Land Tax [1978] 1 NSWLR 523 at 526 per Hutley JA with Moffit P and Glass JA agreeing. By contrast, in Cappid at p 153, the High Court concluded that whenever any distribution of taxpayers profits or gains took place it required to be either to or upon the order of the members. The company accordingly failed a test expressed in similar language to the present case. CBH falls into the former category: its assets cannot be distributed or applied to or for its members, but must be applied to its objects, not only by its constitution but also by statutory direction. 120 Clause 4 of the Memorandum of Association is undoubtedly anomalous having regard to the provision in articles 110, 111 and 114. However, s 35A is clear in its terms proscribing the distribution of profits or assets of CBH among its members. Further, contrary to the Commissioner's submission, upon a winding up, the provisions of s 35A(e) do not merely make distribution dependent upon the decision of the State Minister. The decision making power invested in the Treasurer of the State concerning distribution upon a winding-up under s 35A(e) is predicated upon the express prohibition that "surplus assets shall not be distributed among the members of the Company but shall be distributed or applied in such other manner as shall be directed by the Treasurer …". (Emphasis added). 121 The fact that growers who are also members benefit from the activities of CBH, not because they are members but because they are growers, does not make CBH an association carried on for their individual profit or gain. If the principal or predominant purpose is made out it matters not that, as subsidiary and incidental to that purpose, CBH's members derive some personal benefit: Commissioner of Inland Revenue v Yorkshire Agricultural Society [1928] 1 KB 611; Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 at p 453; Incorporated Council of Law Reporting for England and Wales v Attorney-General [1971] 3 All ER 1029; Council of Law Reporting of the State of Queensland v Federal Commissioner of Taxation (1971) 125 CLR 659. Furthermore, the fact that CBH charges for its services does not mean that its purpose is to make profits or gains for its individual members. 122 I conclude that CBH is "not carried on for the profit or gain of its individual members" in their capacity as members, that being the capacity in which they are referred to in the qualification to s 50-40 Item 8.2.

Conclusion 123 CBH satisfies both the positive and negative criteria in Item 8.2 under s 50-40. It is accordingly entitled to exemption under s 50-1. I would accordingly allow the appeal with costs. There will be further orders to the effect that the Commissioner's objection decision notice of which was issued on 25 November 2008 be set aside and that the Commissioner rule on the question stated in the notice of private ruling by substituting the word "Yes" for the word "No" under the heading "Ruling".` I certify that the preceding one hundred and twenty-three (123) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.