Co-Operative Companies
20.29. Division 9 of Part III of the Act contains provisions setting out the basis of assessment of co-operative
companies as defined in that Division. One effect of these provisions is to exclude the application of the mutuality
principle in the taxing of such companies. Under the definition, if a company is to qualify as a co-operative company,
there must be limits imposed by its rules on the number of shares which a member may hold, quotation of the shares of
the company on a stock exchange must be
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prohibited, the company must be established to carry on a business
having as its primary purpose or purposes one or more of certain stated objects, and 90 per cent of business must be
transacted with members. Most co-operatives have objects that relate to primary production activities.
20.30. A co-operative company is entitled to deduct amounts distributed to members by way of rebates or bonuses on business done with the company, and by way of interest or dividends on shares. A co-operative company having as its primary purpose one of the objects stated in the definition may deduct amounts repaid to the Australian or State Governments. Submissions to the Committee have maintained that the special basis of assessment of co-operative companies gives to these companies unfair trading advantages. Other submissions have sought the retention of the present position, and in some cases, complete exemption of co-operative companies.
20.31. It may be helpful in judging the present basis of assessment of co-operative companies to consider how they would be taxed if there were no special provisions. On one approach, a co-operative would be entitled to deductions of rebates and bonuses paid to members, based on business done by members with the co-operative, to the extent that the rebates and bonuses had the character of discounts allowed to members. The fact that the discounts on this basis were paid to customers who were also members would not, it is thought, prevent them being deductible. To the extent, however, that the rebates and bonuses had the character of distributions of profits, they would be treated as dividends paid by the co-operative and, like dividends paid as such, would not be deductible. Interest on borrowings by the company would be deductible.
20.32. On this approach, the taxation of a co-operative company would differ in three respects from taxation under the special provisions:
- (a) Rebates and bonuses that are not covered by profits made from transactions with members and are therefore paid from investment income of the co-operative or from profits made from transactions with non-members would probably not be deductible.
- (b) Rebates and bonuses that are not paid from the net gain made by the co-operative from transactions with the particular member to whom they are paid would probably not be deductible.
- (c) Dividends paid by the co-operative to members would not be deductible.
The third difference may not be thought important, since dividends paid by co-operatives are not significant in amount. The first and second, however, indicate that under the special provisions a measure of concession treatment is given to co-operatives.
20.33. In the absence of the special provisions it would be possible to approach the taxation of a co-operative in
terms of the principle of mutuality. On this approach much the same consequences would follow as on the approach that
would allow deductions of rebates and bonuses which have the character of discounts. Gains from transactions with
members which the rules required should be returned to members as rebates and bonuses would not be treated as income
of the co-operative. This would be so even though the gains are returned on a class basis, i.e. the rebate or bonus to
a particular member is not necessarily proportional to the gain in fact made
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from transactions with him.
To this extent the tax treatment would be more favourable than under the discount approach. Investment income and
gains from transactions with non-members would be taxed without diminution by deduction of rebates and bonuses paid to
members. Again it could be concluded that under the special provisions a measure of concession treatment is given to
co-operatives.
20.34. The concession treatment is, in effect, given only to investment income and income from trading with non-members. The extent to which there may be income from non-members is limited by the provisions requiring that 90 per cent of a co-operative's business must be with its members if it is to qualify for the concession treatment.
20.35. If the law were to require that all of a co-operative's business activities must be with its members, or that the co-operative should be taxed on income from business with non-members, as is presently the case in Canada and New Zealand, it would, in effect, be taking away any concession treatment. The Committee appreciates the argument that the concession may give an unfair advantage to a co-operative in competition with other commercial organisations. However, whether any concession treatment now given should be limited—or, for that matter, extended—is a Government policy question. It is important, nonetheless, that the tax treatment of co-operatives be seen in correct perspective.
20.36. The Committee has received submissions requesting that the requirement for 90 per cent of a co-operative's business to be with members be relaxed. It was suggested that if a co-operative undertook secondary activities, possibly of a community nature, in which less than 90 per cent of the business was with the members it would lose the deductions for rebates and bonuses to members while its revenue would continue to be assessable income. The Committee does not feel that the present provisions should have this effect and suggests that it be made clear that any secondary activity would be treated as a separate business for tax purposes. The taxation of this separate business would not affect the concessional treatment of the main activity.
20.37. Co-operative companies may deduct certain loan repayments to governments. On general considerations of equity, the Committee considers that the deduction for repayment of moneys to governments should be withdrawn.