Shelley v Federal Commissioner of Taxation [1929] HCA 31

Shelley v Federal Commissioner of Taxation [1929] HCA 31 | Case summary | Zoe

in the ascertainment of his taxable income because of par. (¢) the definition of "income " in sec. 4 of the Income Tax Asses Act 1922-1927. That paragraph provides: " 'Income' . not include (c) any rebate received by a member of a co-opera company based on his purchases from that company where ¢) Commissioner is satisfied that ninety per centum of its sales is madet its own members." The Commissioner was in fact satisfied ninety per cent of the Company's sales were made to its own membe but he denies that it was a co-operative company. He further mai tains that even if the Company were co-operative, the taxal income should not be reduced by these sums. He says that ps (c) of the definition of "income" does no more than forbid inclusion of rebates from a co-operative company in the as income as revenue ; that properly understood the sums in que! are not receipts or revenue, but mere reductions or diminutions ¢ the amounts which otherwise the taxpayer would expend ina ing his goods. Sec. 23 (1) provides that " in calculating the ta income of a taxpayer the total assessable income derived by taxpayer . . . shall be taken as a basis, and from it there be deducted (a) all . . . outgoings . . . including . expenses actually incurred in gaining or producing the ass income." The Commissioner concedes that when he is satis that ninety per cent of the sales of a co-operative company are mad to its own members, rebates received by a member based on } purchases from that company are not to be included in the member total assessable income, but he contends that if these p are made in the way of trade or business, and the sums laid ou them are therefore to be deducted as outgoings or expenses incume in gaining the assessable income, then it is not the gross amoun charged in the first instance which is to be deducted from the asses able income but the net amount actually expended, arrived at | diminishing the gross amounts by the rebates. It is to be observe that this argument leaves little or no operation to par. (c). Fo if a rebate, based upon purchases, is a mere reduction of expenditut : it could not be a receipt or constitute revenue, whether the expendi ture was made in order to produce income, or for some other reaso

Industrial Producers Co-operation, Co-operative Credit and Banking, Agricultural Co-operation." This or some similar classification is generally adopted, but usually without much attempt to discern and define the common characteristics which the word "co-operation " is intended to express. The late Mr. Aneurin Williams, who contributed the article upon Co-operation to the 11th edition of the Encyclopedia Britannica, was alive to the lack of a clear conception of what the term " co-operative " exactly connotes when thus used, and he made some endeavour to supply the want. In effect, he considered that there must be a voluntary association or working together for the production or distribution of wealth, but so that the shares of those concerned were not determined by competition (ie., a struggle and the relative ability of each to secure a large share) and so that all concerned had an opportunity to share in the ultimate control. But he found it necessary to add: - * We speak of co-operative societies for agriculture, for manufacturing, for retail, or wholesale distribution, for building or house-owning, for raising capital and so forth ; while the great Friendly Societies though a part of co-operation as a theory of life, are not part of the co-operative movement. The line is somewhat hard to draw, and consequently is drawn somewhat arbitrarily. Thus while a society for building, or for the collective ownership of houses, is counted a co-operative society, a building society (as we ordinarily understand the term), though it be purely mutual in its basis, is not so counted in Great Britain, but is in the United States." This attempted analysis leaves out of account an element which some writers, who perhaps discuss co-operation rather as a means of social, economic or industrial amelioration, describe as essential to the conception. This element isthe free or unrestricted admission to membership of the co-operative association. Thus Mr. C. R. Fay in his Co-operation at Home and Abroad (2nd ed., 1920, pp. 4-5) says : - ' The ultimate criterion is this: are the members prepared to admit to the benefits of their society on proportionately equal terms all those who, being of suitable character, are commercially as weak as or weaker than themselves ? If so, the society is co-operative. We have, therefore, as our final definition of the co-operative society: 'An association for the

purposes of joint trading, originating among the weak and con always in an unselfish spirit, on such terms that all who are prep to assume the duties of membership share in its rewards in propor to the degree in which they make use of their association.' narrower definition runs the risk of excluding much that ¢ and is recognized, to be co-operative." (See, too, Webb, C Co-operative Movement, at p.9.) The capacity of such an associ enlarge its membership is almost necessarily inconsistent with tribution of dividend upon share capital, and with the existe fixed capital divided into shares. To multiply shares would reduce dividends, if what the rules of the co-operative union dese as "' the fund commonly called profit," was distributed as a di upon share capital. But additional members could not be indefinitely without indefinite multiplication of shares. Those who regard co-operation from a business point of that the thing which distinguishes it from all other forms of tion for trading or production, is that the surplus remaining : the capital invested has been rewarded by a fixed percentage and expenses have been met, is distributed or allocated among themem in proportion to their dealings. Thus in the Co-operative Whi Societies' Bank, the surplus, which remains after a period of busin is appropriated to increase interest upon deposits, and to r charge for overdrafts. (Webb, Consumers' Co-operative Mo p. 99). In Ireland the provision usually made by the co-op agricultural and dairying societies is, or was, (1) that the sur arising from general business should be appropriated first in pay! of a fixed percentage on share capital, next in a subvention to rest and then in a distribution of the balance among members in tion to their sales through, and purchases from the society; (2) t the surplus arising from the dairying business, after pro for a fixed percentage on share capital should be appropriated paying to employees an additional remuneration of a i percentage on wages, and in distributing the balance amongst # who supplied milk, cream or other produce to the society, in pr tion to the value of their supplies. (See Industrial Co-op 3rd ed., p. 153, by Catherine Webb). In consumers' co-ope t although an equal division of profits is recognized (see

purchases is required by what is called " the Consumers' Theory of Co-operation." " This," says Mr. Anewrin Williams in his Co-partner- ship and Profit Sharing, at p. 215, "is, that all profit is due to the consumer, that, in fact, the value of everything is caused by him, seeing that if there were no consumers desiring to purchase, even the rarest thing, and the thing produced with the most labour and capital would be valueless. If the consumer, says this theory, be charged 7d. for what costs the producer 63d. to produce - including cost of materials, wages, and all necessary expenses - then he is overcharged a $d., and he has a claim to have that 3d. returned to him. If the 4d. is retained by the producer it is a profit on the price for which he sells the article, and profit on price is the forbidden fruit in the eyes of this school. They claim that a society which pays out its so-called profits to its customers as a dividend on their purchases, does not really make any profit; it merely retains, temporarily, a balance belonging to the consumer and ultimately returned to him." The British Legislature took account of these features in co-opera- tion, and by the Industrial and Provident Societies Acts 1852, 1862 and 1876 (now consolidated in that of 1893) provision was made for the incorporation and regulation of societies with limited liability but without a specified nominal capital and therefore capable of admitting an indefinite number of members. A limit was placed upon the number of shares which one person might hold. In partial Tecognition of the theory of profit, or absence of profit, held by co-operators, it was provided that a registered society should not be chargeable under Sched. C of the Income Tax Acts (profits arising from interest, annuities, dividends and shares of annuities payable out of any public revenue) or Sched. D (balance of profits gains from trade, vocation, &c.) unless it sells to persons not members thereof, and the number of shares of the society is limited either by its rules or its practice. (See sec. 24 of the Industrial and Provident Societies Act 1893 (56 & 57 Vict. c. 39) and sec. 39 (4) and 1th Sched. of the Income Tax Act 1918 (8 & 9 Geo. V. c. 40)). profits or surpluses of such societies were, however, subjected excess profit duty (see Finance Act (No. 2) 1915, 4th Sched.,

The Company in fact has acquired and supplied to its members commodities in which they trade. It charged a price calculated by adding to the net cost price charged to it (but without deducting a special discount arranged for with the supplier) the costs of handling, &c., and } per cent to cover expenses and dividend of 8 per cent on its capital. The price so obtained was paid to it by its members, and was sufficient to meet the items of expenditure for which it was required. But in fact the Company obtained from its suppliers a special discount, with the result that a balance of profit remained to it and this was divided amongst the members. The special case says : - '* The amount so divided was calculated separately in respect of each commodity in the manner hereinafter stated. That part of the amount so divided which was paid to each member in respect of each commodity (other than kerosene) was that part of the special discount allowed to the Company in respect of that commodity which the Company considered was attributable to that part of such commodity which such member had purchased." The distribu- tion is not precisely in conformity with art. 137 because it discrimin- ates among the various classes of commodities bought. The article contemplates a distribution of a lump sum of profit in proportion to all purchases. The principle of division is nevertheless co-operative in its general character. But the Company does not employ this principle of division for the purpose of supplying consumers or users of the commodities. The members whom it supplies are indeed traders, who deal in the commodity for profit. They are employing the co-operative principle to facilitate the very method of distribution which the originators of "' The Co-operative Movement " desired to teplace. But if by its constitution the Company had other attributes which would entitle it to the description co-operative, this fact might not be enough perhaps to take it outside the description. For instances are given of co-operative societies, one of which has even gone into production for exchange, and another accommodates shopkeepers with the use of its refrigerating store. (Webb, Con- sumers' Co-operative Movement, pp. 76, 80.) Indeed the Wholesale Co-operative Society which supplies retail societies is said to be

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Judgment (145 paragraphs)