Revesby Credit Union Co-operative Ltd v Federal Commissioner of Taxation [1965] HCA 2;

Revesby Credit Union Co-operative Ltd v Federal Commissioner of Taxation [1965] HCA 2; - HCA 1965 case summary — Zoe

[30]

20. Before considering the interpretation of s. 117 I will deal with the appellant's contention that by virtue of the principle of mutuality the dividend paid to the members is not income at all but is merely a repayment of part of their contributions made to a common fund for a common purpose. The principle of mutuality seems to me to be settled. Where a number of people contribute to a fund created and controlled by them for a common purpose any surplus paid to the contributors after the use of the fund for the common purpose is not income but is to be regarded as a mere repayment of the contributor's own money. (Bohemians Club v. Acting Federal Commissioner of Taxation [1918] HCA 16; (1918) 24 CLR 334 ). Incorporation of the fund is not relevant (New York Life Insurance Co. v. Styles (1889) 14 App Cas 381 ). What is required is that the fund must have been created for the common purpose and owned or controlled wholly by the contributors. If it is owned or controlled by anyone else the principle cannot apply (Equitable Life Assurance Society of the United States v. Bishop (1900) 1 QB 177 ). Furthermore any contributions to the fund derived from sources other than the contributors' payments, such as interest from the investment of part of the fund, or income from a business activity conducted by the members, cannot be taken into account in computing the surplus (Carlisle and Silloth Golf Club v. Smith (1912) 2 KB 177 ). Also the cases establish that the principle cannot apply unless at any given point in time the contributors to the fund are identical with the beneficiaries of the distribution of the surplus (New York Life Insurance Co. v. Styles (1889) 14 App Cas 381 ). In the instant case it is clear that the principle cannot apply to deprive the dividend of the character of income. The dividend in question is the surplus of revenue over expenditure as set out above. The greater part of the revenue is drawn from two sources namely, interest on loans to members and interest on investments in associated credit societies. The contributors to the revenue are those members who have current loans and the societies in which money is invested. However the beneficiaries of the payment of the dividend are all the members. Thus it is immediately apparent that there must be a disparity between the contributors and beneficiaries at any given point in time. First of all members are current borrowers, and secondly some members are not entitled to obtain loans as they live outside the parish of Revesby and do not satisfy the geographical qualification that a member must satisfy before he can obtain a loan. Thus some members who are not contributors to the fund from which the surplus is drawn are beneficiaries and accordingly the dividend cannot be regarded as a repayment to the members of their own money which they had previously contributed, as many of them had not made a contribution to the revenue at all. It should be regarded as the proceeds of the society's business dealings with a number of its members and should be classed as income. (at p575)

[31]

21. I have next to determine whether the appellant society is a co-operative company within the meaning of s. 117. The question raised in the application of this section to the present case is whether the appellant society is "established for the purpose of carrying on a business having as its primary object or objects . . . (d) the rendering of services to its shareholders". This involves an inquiry to ascertain the primary object or objects of the carrying on of the business and then a consideration of whether the objects so ascertained fall within the description of par. (d) of s. 117. The method of ascertaining the primary objects of a business was discussed in the joint judgment of Dixon C.J., Williams and Webb JJ. in A. & S. Ruffy Pty. Ltd. v. Federal Commissioner of Taxation [1958] HCA 18; (1958) 98 CLR 637, at pp 648, 649 . Their Honours first noted that the section refers not to the objects of the company but to the objects of the business, and then that as the object clauses in the memoranda of association of most commercial institutions contain "the customary heterogeneity of objects" it is extremely difficult to form a judgment as to which objects are "primary" and which are not. Accordingly their Honours took the view that one should not look exclusively or even initially at the objects set out in the memorandum, and went on to examine the actual conduct and structure of the business to ascertain the "primary" object of the business. However in the present case the objects (quoted above) expressed in the Model Rules governing the constitution of the appellant society are not a collection of unrelated purposes of which none can be considered to be paramount. Taken as a whole they reveal the unified and single purpose to assist the members of the appellant society in solving the various economic problems which arise in the course of a man's life and in particular to achieve this end by lending money to the members and supervising the expenditure of the money lent. But in view of what was said by Dixon C.J., Williams and Webb JJ., I cannot let the matter end there. I consider that I can take this into account but if the conduct of the business by the appellant society reveals that the primary objects are other than that indicated by the object clause in the Model Rules I cannot give the Model Rules precedence. The main test to be adopted in ascertaining the primary object is to ask what the actual activities of the appellant society indicate it to be. The activities of the appellant society have been fully described above. Generally it engages firstly in the leading of money to its members with or without security at rates of interest, which, after the rebate is taken into account are lower than current market rates, and in many cases where credit on any terms would not be otherwise available ; secondly, in the giving of advice and guidance where sought to its members in respect of the circumstances surrounding the making of a particular loan and in respect to the management of their financial affairs generally ; thirdly in assisting members in certain cases by positive acts for example, appearing in court or paying an account ; and fourthly in organizing and promoting the education of members in financial affairs by the "cottage" discussions. The object of a business is, to my mind, what the business in fact does. In this case the appellant society does not merely lend money. Its activities are not directed to making profits for the members because its funds could be invested at rates of interest far higher than the rates paid by the borrowing members, and also because part of the profits are returned to the borrowers. The various activities are not isolated and unrelated to each other but taken as a whole form an integrated scheme for the assistance of members in overcoming their financial problems and in particular to achieve this end by providing a ready source of cheap credit together with incidental advice and assistance as each case may require. The facts that in making a loan, the appellant society puts little emphasis on valuing and obtaining adequate security and that it gives loans to persons who commercially would be regarded as bad risks rather than to those who could afford to repay the loan indicates that it is not conducting itself like a money-lending institution and that its object is not mere money lending. Thus I must differ from the Board of Review on the nature of the primary object of the appellant society in concluding that the actual primary objects of the business conducted by the appellant society are quite in accordance with those expressed in the Model Rules. (at p577)

[32]

22. The next question to be determined is whether the conduct of these activities which I have designated to be the primary object of the business of the appellant society amount to "the rendering of services" within s. 117 (d). These activities must be considered as a whole and not separately and accordingly the question is not whether the lending of money by itself or the giving of advice and assistance by itself is the rendering of services but whether the whole of the appellant society's activities taken together constitute "the rendering of services". The Shorter Oxford Dictionary defines "service" as "the act of helping or benefiting", and in the plural, "friendly or professional services". This is a broad definition. It would include all the things contemplated by the word "services" in the common phrase "goods and services". It would include any consideration given in the performance of any ordinary commercial contract, as well as all those activities more specifically called services, which do not actually involve the production or processing of goods, for instance, banking and financing, transportation, and insurance. In the case of Employers' Mutual Indemnity Association Ltd. v. Federal Commissioner of Taxation [1943] HCA 36; (1943) 68 CLR 165 the Full Court had to consider whether a mutual insurance company in issuing policies and in investigating and either resisting or paying on claims was engaged in "the rendering of services" to its policy holders. The Court with Rich J. and myself dissenting held that neither the issuing of insurance policies nor the investigation, resisting and paying of claims was "the rendering of services" to the policy holders. In the opinion of Latham C.J. "the rendering of services" must involve the doing of work of some kind. The mere making of a contract, such as the issuing of an insurance policy cannot be put into this category, even though work may be done in pursuance of the contract. Furthermore, the Chief Justice did not regard ordinary commercial dealing on terms acceptable to each party as the rendering of services. But he did not further define the phrase. I would have thought that the performance of work for the benefit of another if in pursuance of a contract would fall within the Chief Justice's general definition but this has been specifically excluded if it merely amounts to a performance of consideration already promised. Starke J. held that "the rendering of services" necessarily involved the "doing of a positive act" and his example was the shearing of sheep. The third majority opinion, that of Williams J., decided that the services which are to be rendered must be of the kind that could result from a contract of services and accordingly must involve a personal and confidential relationship so as to make them unenforceable specifically in Equity. The minority opinions of Rich J. and myself agreed that the word "services" refers to services of the same nature as those rendered by a business enterprise in satisfying the business needs of persons having recourse to it. It is immediately apparent that the majority judgments do not reveal a common opinion as to the nature of "the rendering of service". However in the light of the decision the broad meaning of the phrase cannot be adopted. But what restriction is to be placed on it ? I consider that "the rendering of services" should consist of the doing of an act for the benefit of another, which is more than the mere making of a contract and which goes beyond the performance of an obligation undertaken in the course of an ordinary commercial contract. In this view I adopt the reasoning of Latham C. J. I regard the activities of the appellant society as clearly falling within the description of "the rendering of services". They are more than the making of an agreement and involve positive acts, as the payment of money to the members, the giving of advice and the provision of facilities for consultation and the doing of the specific acts of assistance mentioned in the evidence. They are clearly the doing of work for the benefit of another and clearly go beyond the performance of the terms of an ordinary commercial agreement. When the appellant society agrees to lend money it only contracts to make a payment. It does not enter into an obligation to give the advice and assistance of which so much evidence was given and which are such an integral part of its activities. Furthermore, the facts that the appellant society is so much a co-operative organization rather than a commercial money-lender, that its effective rates of interest are lower than current market rates, and that it gives loans without regard to security and in many cases where commercial institutions would not venture to risk their money, in my view deprives the transactions of the appellant society of that commercial element which characterizes the activites of ordinary commercial and financial institutions. Even though a member who has obtained a loan is obliged to repay the capital and pay interest, the terms are such that by comparison with current market standards a benefit is being conferred upon him. (at p579)

At a glance

Court

Decision date

Before

Source

Judgment (34 paragraphs)

Revesby Credit Union Co-operative Ltd v Federal Commissioner of Taxation [1965] HCA 2; (1965) 112 CLR 564 (22 January 1965)

Parties

Legislation Cited (2)

Cases Cited (4)