Social Credit Savings & Loans Society Ltd v Commissioner of Taxation

Social Credit Savings & Loans Society Ltd v Commissioner of Taxation - [1971] HCA 61 - HCA 1971 case summary — Zoe

[22]

Every member shall hold at least one share, but no member shall hold shares exceeding the nominal value of five hundred pounds nor shall any member hold more than one-fifth of the shares in the Society. By the amendment registered on 17th May 1967 this rule was amended to read: "Every member shall hold one share." By the amendment registered on 20th February 1969 the word "only" was added after the word "share". Rule 16 in its original form read as follows: The funds of the Society shall be applied to carry out the objects of the Society. Any surplus resulting from its operations during a financial year, after providing for depreciation in value of the Society's property or for contingent liability for loss shall at the end of the financial year be applied in payment of dividend on shares and/or as a bonus or rebate of interest paid or due by borrowing members such rebate being based on the business done by such members with the Society and/or as a bonus to any officer or employee; provided that the maximum amount which may be paid to a member by way of dividend in respect of any share held by him shall not exceed five per centum per annum on the amount paid on the share. By the amendment registered on 17th May 1967 the second sentence of this rule was amended to read: Any surplus resulting from its operations during a financial year, after providing for depreciation in value of the Society's property or for contingent liability for loss may at the end of the financial year be applied in payment of as a bonus or rebate of interest paid or due by borrowing members such rebate being based on the business done by such members with the Society and/or as a bonus to any officer or employee. After the amendment effected on 20th February 1969 r. 16 read: The funds of the Society shall be applied in carrying out the objects of the Society. Any surplus resulting from its operations during a financial year, after providing for depreciation of the Society's property shall be placed in a Reserve Fund for contingent liability for loss. Provided that such Reserve Fund shall not be distributed among members of the Society except in the event of winding up. Provided also that in the event of winding up only members to whom a loan has been made shall share in the distribution of the Reserve Fund. Rule 136, in its original form, provided: The winding up or dissolution of the Society shall be carried out in accordance with the provision of the Act, namely the Industrial and Provident Societies Act, 1923-1966 S.A. which by s. 49 (2) applied the provisions of the Companies Act 1962 S.A.. By the amendment registered on 20th February 1969 the following words were added to the rule: Provided that on winding up, a member shall not in respect of the share held by him be entitled to receive an amount in excess of the amount paid thereon. Any surplus remaining shall be distributed only to members to whom loans have been made. Finally, r. 137 provides: The shares of the Society shall not be quoted for sale or purchase at any Stock Exchange or in any public manner whatever.

[30]

The second of these requirements is, and has at all material times been, satisfied by r. 137. However, it is doubtful whether the first requirement is satisfied, because it does not appear that r. 13, in any of its forms, limits the number of shares that may be held on behalf of, as well as by, a shareholder, and in the form which it assumed from 17th May 1967 to 20th February 1969 it is not clear that it imposes a limitation on the number of shares that may be held rather than lays down a minimum shareholding. It is, however, unnecessary to resolve that question because, in my opinion, the third requirement laid down in s. 117 is not satisfied. It seems to me clear the the Society's business did not have as one of its primary objects the obtaining of funds from its shareholders for the purpose of making loans to its shareholders to enable them to acquire land or buildings to be used for the purpose of residence or of residence and business, within par. (e). It is true that it would have been within the objects of the Society as stated in r. 5 of its Rules (particularly in cll. (c), (e) and (h)) to make loans to enable members to acquire land or buildings, although the fact that r. 48 limited to $800 the amount of the borrower's total indebtedness rendered it unlikely that loans would be made for this purpose. However, in determining the primary object or objects of the business of a company for the purpose of s. 117, the Court does not look exclusively at the objects expressed in the memorandum of association but must in addition consider the activities actually carried on by the company: A. & S. Ruffy Pty. Ltd. v. Federal Commissioner of Taxation [1] ; Revesby Credit Union Co-operative Ltd. v. Federal Commissioner of Taxation [2] . In fact, the evidence does not show that the Society ever made any loans to enable its members to acquire land or buildings and certainly this was not the purpose for which loans were usually made. It follows that it is impossible to say that it was a primary object of the business of the Society to obtain funds for the purpose of making loans to its members to enable them to acquire land or buildings. 1. (1958) 98 C.L.R. 637, at pp. 649, 656. 2. (1965) 112 C.L.R. 564, at p. 576.

[38]

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 activities 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. It may be true to say in the present case also that the Society is rather a co-operative organization than a commercial money-lender and that its transactions lack the commercial element which characterizes the activities of ordinary commercial and financial institutions and that the terms on which loans are made are such as to confer a benefit on the borrower by comparison with current market standards. These circumstances in themselves would not, in my opinion, justify the conclusion that the making of loans by the Society can be described as the rendering of services to its members within par. (d). The other matters on which McTiernan J. relied - the giving of guidance and advice and the doing of specific acts of assistance for the benefit of the members, which formed an integral part of the activities of the appellant Society in that case - are not, so far as the evidence discloses, present in this case, except either as merely incidental to the making of the loans or as isolated instances. 1. (1965) 112 C.L.R. 564. 2. (1965) 112 C.L.R., at p. 569. 3. (1965) 112 C.L.R., at pp. 573-574. 4. (1965) 112 C.L.R., at p. 574. 5. (1965) 112 C.L.R., at p. 576. 6. (1965) 112 C.L.R., at pp. 578-579.

[45]

The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial. However the identity of which Lord Macmillan speaks is identity as a class. In Faulconbridge (H.M. Inspector of Taxes) v. National Employers' Mutual General Insurance Association Ltd. [3] , Upjohn J. said: Finally, viewed in the light of the other cases, I think it is clear that when Lord Macmillan speaks of the cardinal requirement being complete identity between the contributors and the participators, he is not referring to individual identity but to identity as a class, so that at any given moment of time the persons who are contributing must be identical with the persons who are entitled to participate; whereas it follows, in my judgment, that it matters not that the class has been diminished by persons going out of the scheme or that others may come in in their place in the future. One of the other authorities to which Upjohn J. referred was Jones v. South-West Lancashire Coal Owners' Association Ltd. [4] , where it was held that the fact that the surplus of the fund at the end of each year was carried to reserve and not at once returned to the members did not mean that the surplus constituted profits. Lord Cave said [1] : In this case, as in the New York Life Insurance Co.'s Case [2] , there are no shareholders interested, and the whole of the yearly surplus remains to the credit of the members, and must either be applied to meeting their future claims or be returned to them on retirement. Sooner or later, in meal or in malt, the whole of the company's receipts must go back to the policy holders as a class, though not precisely in the proportions in which they have contributed to them; and the association does not in any true sense make a profit out of their contributions. In Revesby Credit Union Co-operative Ltd. v. Federal Commissioner of Taxation [1] , McTiernan J. stated the rule in accordance with those authorities when he said [2] : 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. 1. [1948] A.C., at pp. 416-417, 419. 2. (1932) 16 T.C., at p. 448. 3. (1952) 33 T.C. 103, at p. 125. 4. [1927] A.C. 827. 5. [1927] A.C., at p. 832. 6. (1889) 14 App. Cas. 381. 7. (1965) 112 C.L.R. 564. 8. (1965) 112 C.L.R., at p. 575.

[47]

But a company can make a profit out of its members as customers, although its range of customers is limited to its shareholders. If a railway company makes a profit by carrying its shareholders, or if any other trading company, by trading with its shareholders even if it is limited to trading with them, makes a profit, that profit belongs to the shareholders in a sense, but it belongs to them qua shareholders. It does not come back to them as purchasers or customers; it comes back to them as shareholders upon their shares. The view that a corporation can make a profit from its members, even if it is limited to dealing with them, was accepted by the Judicial Committee in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agriculture Income-Tax, Assam [1] . There an incorporated society, which produced tea, consisted of only two members to whom the whole output of tea, with an immaterial exception, was sold at market rates. Under the rules of the society the net profits need not necessarily be distributed among the members but might be applied, e.g. in, respect of depreciation or by appropriation to a reserve fund, or by appropriation to a special fund for making grants as determined in general meeting. It was held that the sale of the tea by the society to its members resulted in taxable profits. Lord Normand said [2] : What kinds of business other than mutual insurance may claim exemption from liability to income tax under the principle of Styles' Case [3] need not be here considered; but their Lordships are of opinion that the principle cannot apply to an association, society or company which grows produce on its own land or manufactures goods in its own factories, using either its own capital or capital borrowed whether from its members or from others, and sells its produce or goods to its members exclusively. In the present case the appellant society is not bound by its rules to sell its tea only to its members, but it could make no difference if it were. No matter who the purchasers may be, if the society sells the tea grown and manufactured by it at a price which exceeds the cost of producing it and rendering it fit for sale, it has earned profits which are, subject to the provisions of the taxing act, taxable profits. Their Lordships concluded [4] that the requirement referred to by Lord Macmillan in Municipal Mutual Insurance Ltd. v. Hills (H.M. Inspector of Taxes) [1] was not satisfied in the case before them, because there was no common fund to which the members of the society contributed and in which they participated. In the course of their opinion their Lordships referred to Liverpool Corn Trade Association Ltd. v. Monks (H.M. Inspector of Taxes) [2] , a case in which an incorporated association, membership of which was confined to persons engaged in the corn trade, provided a corn exchange and other facilities for the purposes of that trade and made charges to its members and other persons permitted to use the facilities proportionate to their use. Subscriptions payable by members were less than those payable by outsiders and the bulk of the receipts of the association were derived from its members. Under the articles, dividends might be declared out of profits. It was argued on behalf of the association that so far as its transactions with its own members were concerned it was a mutual association but this submission was rejected by Rowlatt J. who held that the subscriptions paid by members should be included in the association's receipts for the purpose of computing its profits. Their Lordships said in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-Tax Assam [1] that this case "is consistent with the view expressed by their Lordships because the shareholders and the contributors to the fund out of which dividends were paid were not identical". 1. (1934) 18 T.C. 499. 2. (1934) 18 T.C., at p. 503. 3. (1934) 18 T.C., at p. 506. 4. [1927] 1 K.B. 33. 5. [1927] A.C. 827. 6. [1927] 1 K.B. 33, at pp. 46-47. 7. [1948] A.C. 405. 8. [1948] A.C., at p. 417. 9. (1889) 14 App. Cas. 381. 10. [1948] A.C., at p. 420. 11. (1932) 16 T.C., at p. 448. 12. [1926] 2 K.B. 110. 13. [1948] A.C., at p. 419.

[49]

The contributors to the fund, on the Society's argument, were the persons who borrowed money from the Society. It is true that all who borrowed were members, but many members were not borrowers. On the other hand, the right to participate in the fund was not limited to members who had borrowed money. In considering the rules, the amendments that did not take effect until 20th February 1969, and thus after the accounting periods with which I am concerned had expired, must be ignored. Rule 16 dealt with the application of any surplus resulting from the operation of the funds of the Society. In its original form the rule required the surplus to be applied at the end of a financial year whereas after the amendment that became effective on 17th May 1967 it permitted but did not compel such an application. The persons who might benefit from an application of the surplus were not confined to those who had paid interest but included officers and employees to whom a bonus might be paid and, before 17th May 1967, members generally. It was submitted on behalf of the Society that the fact that the surplus might have been applied in favour of employees did not mean that the principle of mutuality could not apply, since the bonus paid to officers or employees should properly be regarded merely as a working expense in the nature of wages. I cannot agree with this submission; it seems to me that the fact that there was power to apply the whole surplus in favour of officers or employees carried the consequence that the surplus did not belong to the persons who had made the interest payments. In any case if the surplus were not applied at the end of a financial year, but remained in reserve - as it in fact did - its ultimate ownership lay in the members of the Society. This was the effect of r. 136 which incorporated by reference the Companies Act, 1962 S.A., s. 247 (2) of which provided that on a winding up the Court should distribute any surplus among the persons entitled thereto, which means among the members in proportion to their shareholdings. It is therefore not possible to say that the members who borrowed money from the Society were entitled - even as a class - to the surplus, or that sooner or later in one way or another the surplus would be returned to them. If the payments of interest are to be regarded as creating a fund, some members who did not pay interest and therefore did not contribute to the fund might receive the benefit of it. There is no identity between the contributors and the beneficiaries of the fund. In this respect the case is indistinguishable from Revesby Credit Union Co-operative Ltd. v. Federal Commissioner of Taxation [1] , where McTiernan J. held that the surplus of the fund that arose in that case should be classed as income [2] .

At a glance

Court

Decision date

Before

Source

Judgment (53 paragraphs)

Parties