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.