Coleambally Irrigation Mutual Co-operative Ltd v Commissionerof Taxation [2005] HCATrans 376 (27 May 2005)

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Coleambally Irrigation Mutual Co-operative Ltd v Commissionerof Taxation [2005] HCATrans 376 (27 May 2005)

Last Updated: 3 June 2005

[2005] HCATrans 376

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S387 of 2004

B e t w e e n -

COLEAMBALLY IRRIGATION MUTUAL CO-OPERATIVE LIMITED

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

McHUGH J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 27 MAY 2005, AT 10.33 AM

Copyright in the High Court of Australia

MR B.W. WALKER, SC: May it please the Court, I appear with my learned friend, MR M. CHRISTIE, for the applicant. (instructed by Jenni Mattila & Co)

MR B.J. SHAW, QC: If the Court pleases, I appear with my learned friend, MR J.O. HMELNITSKY, for the Commissioner. (instructed by Australian Government Solicitor)

McHUGH J: Yes, Mr Walker.

MR WALKER: Your Honours, this is a case where a matter of organisation, in this case, a non-trading cooperative incorporated with its constitution devised in accordance with New South Wales statute, was also and not coincidentally, devised in accordance with the guidelines or strictures provided in advance by the Australian Taxation Office in relation to - - -

McHUGH J: They are your points of prejudice, but they do not affect the legal issue.

MR WALKER: No, they may or may not - - -

McHUGH J: You may have been led into this by the rulings of the Department, but you now have to face up to the law.

MR WALKER: Your Honour, I - - -

HAYNE J: The ATO may think that the press release is more important than the Act, but.

MR WALKER: I do not. We are not putting the press release as laying down the law at all. I was actually starting with the point of general public importance, your Honour. This is a point of general public importance because your Honours can be assured by the circumstance that your Honour has truncated in its presentation of which your Honours are well aware, you can be assured that we are not the only one, that this is a widespread - - -

McHUGH J: Why can we be sure of that? Does that mean that all the co-operatives have a rule similar to 75 which says, after satisfaction of debts and liabilities, the surplus can be transferred to an institution which has objects similar to those of the Mutual?

MR WALKER: In practice, yes. Your Honours have seen the reference to section 15 of the Co-operatives Act which is set out in paragraph 8 on page 48 of the application book in our submissions. Yes, because there is a requirement that the constitution provide that there not be distribution to the contributor members, then the form that your Honour has drawn to attention is indeed a very common form; that is, it is not a one-off for us.

HAYNE J: Now, how confining is that form of winding-up provision?

MR WALKER: It is confining completely, that is utterly, in relation to the point upon which - - -

HAYNE J: How similar is “similar”?

MR WALKER: I am sorry, the object “similar”.

HAYNE J: Yes.

MR WALKER: As your Honours have seen, it is set out in paragraph 6 of our submissions at page 48 of the application book. Our objects include providing future funding for timely replacement and refurbishment of Coleambally Irrigation infrastructure. When one thinks about the physical location of the business, that is, the farming operations of the member contributors it would be, for example, difficult to include within the notion of “similar”, the provision of infrastructure say, for farmers in Western Australia.

McHUGH J: Why?

HAYNE J: There is the point.

McHUGH J: That is the point. Why could we not give it to Humpty Doo?

MR WALKER: Your Honour, that is my answer to your question. Would “similar” include irrigation all over the world?

HAYNE J: Let us not enlarge it unduly.

MR WALKER: Well, there is charity here, your Honour.

HAYNE J: Would it include irrigation infrastructure beyond Coleambally?

MR WALKER: No. That is our submission.

McHUGH J: But it talks about objects.

MR WALKER: Yes.

McHUGH J: It has to have objects similar to those of the Mutual.

MR WALKER: And the question would be, and we accept that it is a question of what is the extent of confinement. The question would be, if this ever were to arise, and what I - - -

HAYNE J: This seems not to have been agitated in a way that finds a reflection in the judgments below.

MR WALKER: That is right. In the judgment - - -

HAYNE J: It seems to have been treated as though objects similar did not put a relevant fetter on disposition on winding up. That is a fetter that bore upon this question of mutuality.

MR WALKER: Your Honour, with respect, is right. That is because the point was taken, and this is explicit in all the reasons below, that whatever be the closeness of object, the money would not be going to the member contributors, because under sub-rule 75.2 that was what was explicitly prohibited, and it therefore did not matter how close the objects were - for example, I have already raised the locational question. It did not matter how close they were, it was not going to the members, and that was enough.

McHUGH J: But I put this to you early because it was perhaps a straw that might assist your case, but if you could show that notwithstanding that it would not be distributed among the members it was going to go to another institution, but say with objects identical.

MR WALKER: We cannot say identical, and - - -

McHUGH J: I know you cannot because of the language, but if you could, maybe there is a point of principle involved.

HAYNE J: But going for the benefit of the members because going to preserve infrastructure in Coleambally and the members were all persons immediately interested in use of Coleambally infrastructure. I can understand that argument, it does not seem to be made.

MR WALKER: As in, for example, an amalgamation scheme.

HAYNE J: Well, there is more than one.

MR WALKER: Two schemes, yes.

HAYNE J: Yes, but that then confines this case to its facts and what is special about it?

MR WALKER: But that was not – that which would have confined it to its particular facts was not argued below. This was argued on the point which does raise the general principle namely, whether it suffices to exclude mutuality that there be the explicit prohibition, and we precisely did not argue that in this case one could be sure that the money paid for an irrigation scheme would continue to be, in effect, at least in part or generally speaking for those irrigators, by reason of the “objects similar to” requirement. We did not argue that. That would have been a much more particular point, although still raising a question of principle, of course, in relation to mutuality.

We simply failed and met the contest below on the ground that it did not suffice to remove mutuality that there was a prohibition. In particular, there was not argued below that the prohibition really did not, in substance, defeat the enjoyment of a return of surplus because of the “objects similar to” clause. We did not have any argument by us, let alone, of course, by our opponents, to the effect that the prohibition on distribution to members was effectively gutted by the requirement that the objects of the recipient be similar to the Mutual.

HAYNE J: Can I play that back to you to see if I understand it, but play it back at a tendentious level?

MR WALKER: Yes, your Honour.

HAYNE J: Was the case below fought on the basis of whether mutuality was excluded because the members of the Co-op could not themselves benefit from distribution on winding up?

MR WALKER: Yes. That is the reasoning below, too - - -

HAYNE J: The only question decided then is about that point.

MR WALKER: Yes.

HAYNE J: There is no wider point decided about the consequence of a winding-up provision, operation of which would confine distribution to objects, not persons, objects which would benefit the members as operation of the Co-operative during its life would benefit them.

MR WALKER: No, that language is not - - -

HAYNE J: You understand the tendentious nature of that formulation?

MR WALKER: Yes, I do, with respect, your Honour, and your Honour’s paraphrase of the issue that was and the other issue that was not presented and decided is correct and I do not have a qualification to express on it. Now, in our submission, it is in fact the first, the one that is raised by our application, that is the more general because the second really is a subset possibility which may be a fallback answer by somebody who would otherwise fail to attract mutuality.

McHUGH J: But traditionally, you have always failed to attract the mutuality principle unless there is an identicality between the contributors to the common fund and those who are entitled to participate.

MR WALKER: Your Honours appreciate that that was not a problem in this case. At one stage, there was a kind of argument which no longer matters, but because my client’s members include the irrigator operator itself, and there was a requirement, mutually, of membership of the other as a membership qualification that there was a lack of identicality. That entirely, of course, ignored the look-through approach. That can be put to one side. The identicality of contributors in the class rather than individual sense, of course, of contributors and those who benefited from the purposes to which the money was being put during the currency, viability of my client, was never challenged and cannot be doubted. They are not least by reason of the very long-term project – that project is not going anywhere, it has fixed improvements to land and the like, it is for a particular purpose in a particular location. The money is for long-term sinking fund purposes. The mutual requirements of membership of the other as a prerequisite for membership absolutely ensured that degree of identicality.

This was a case which foundered on that notion of ownership with all the looseness, the necessary looseness of that concept as applied in this area of law, of ownership being defeated simply and solely by the prohibition which the Co-operatives Act required on the one hand, and as it happens, again not coincidentally, in its understanding and application of the mutuality principle, the ATO expected to see as well.

McHUGH J: Yes, but your difficulty is that article 75 expressly prohibits - - -

MR WALKER: That is the difficulty, and that is why we failed.

McHUGH J: I know.

MR WALKER: And that does raise - - -

McHUGH J: You have to turn the principle of mutuality in this area of the law on its head, have you not?

MR WALKER: Could I attempt that gymnastic as follows, your Honour. The ownership in question, one can state as a first proposition, absolutely incontestable, does not mean legal ownership because, of course, the money was paid to my client, and my client is emphatically not its members. So that in terms of ordinary concepts of ownership, we know that when one talks about ownership in this area of the law, talking about the attraction of the mutuality principle, we are assuredly not talking about ordinary ownership.

The second thing is, the in substance inquiry that the authorities require - and it is not to be expected that that would be departed from, I make that clear in our application – the in substance requirement, not being defeated by actual legal and if it matters, beneficial ownership of the money in somebody other than the members, falls to be tested by a number of different possibilities, and the cases have thrown up different possibilities. Your Honours will recall, of course, that the dedication of part of an annual surplus, I stress an annual rather than a winding-up surplus to employees, was enough.

McHUGH J: I appreciate that, but you talk about “in substance”, but in substance, the contributions do not belong to the members. They do not belong to the members because the rule prohibits them being distributed to the members. They have to be distributed to others.

MR WALKER: Your Honour, could I suggest, first of all, in our submission, that problem, difficulty, conundrum is, in our submission, in any event, a fit reason for this to be the subject of a grant of special leave, to find out whether this concept of owned in substance, when we know we are not talking about legal ownership, is to be defeated by a provision which, as your Honours have seen from the material about the public importance of this case, comes as a surprise to those concerned not only with the administration, but trying to organise their very important, serious financial and property affairs on this basis. That makes it a special leave point.

But, going to the merits of the question, that is, were leave to be granted, do we have prospects of success on the point? In our submission, yes we do, and for this reason. Your Honour is focusing upon something that may never happen, that is, it may happen so far in the future that it would appear to be a very, very slight indication against the ownership in substance, during the lifetimes of contributors, of money they give to their co-operative that they have constituted, which is used for their purposes, and which they supply by the form of mutual association called a co-operative, to be used for their purposes.

So that while the co-operative operates, that is, while the scheme operates which calls for contributions, because once it stops contributions stop, it is clear that the money will be devoted for their common purpose, which goes back, of course, to the original judicial statements about the notion of mutuality.

McHUGH J: You are talking about The Bohemians Club.

MR WALKER: Yes, so that it will be devoted for common purpose, while ever the scheme operates, which calls for contributions, and this is all about how do you characterise the receipt of the contributions? So that this notion of a winding-up surplus is talking about something which, unless one adopts a fatalist view of all human affairs, may never happen, certainly may never happen for so long that in terms of the trading and personal lifetimes of contributors, it becomes a meaningless concept. It will never operate in their lifetimes. The courts below are using that as an indication or telltale to characterise what the courts call for as being an “in substance ownership or not” question, for the generations, literally, human generations, of contributions received and expended, as it happens, for common purposes.

Now, one is tempted to use expressions like “the tail wagging the dog”. That perhaps really does not advance the argument, but it is the kind of argument which, in our submission, this Court would take seriously in relation to any test which calls for a characterisation in substance, because in substance you can see that the vast majority of contributions - after all, nobody would be making contributions on the basis of producing a surplus unexpended on irrigation infrastructure. They want money spent on irrigation infrastructure, and to be ready when huge expenders are needed from time to time.

The question is whether the ultimate, possible, not inevitable fate of a surplus which itself may be very, very small, whether that is such as to dictate - that is how the reasoning below operates, it was a trumping factor. To dictate the outcome of this characterisation in substance, in our submission, is very much a special leave question on which we most certainly have prospects when one considers that the dominion bestowed by the choice that is the destination of any surplus, on the members, being something which they are explicitly aware of when they apply to become a member, they know they are going to get a choice - or their successors in the class of contributor – will get a choice as to how their money will be spent if there is any left over after all the common purpose for which they have contributed and will be contributing, has been exhausted.

That dominion, the choice of destination approach, in our submission, is not such as to indicate a failure to own in substance, but
rather reinforces that this is a scheme under which, while it is operating, the contributions made and required, being spent on common purposes of an entirely mutual kind, utterly attracting mutuality principles, may or may not, but may produce a surplus which itself, as I say, may be very small, and that surplus will be dealt with as the members want, that being in substance, one of the characteristics, not the only characteristic, but one of the characteristics of ownership in the loose sense required.

In our submission, this case does provide, not least because it does not have specific facts concerning some hypothetical scheme, one hopes 80, 90 years down the track when some other irrigation scheme may be in the offing, that this one needs to be closed down. Because we do not have facts like that, because it does raise this extremely important general test of what are sufficient indications of a hypothetical kind, distribution of a winding-up surplus, that makes it very much a special leave question, in our submission. Your Honours will have seen the affidavits respectively - - -

McHUGH J: Yes.

MR WALKER: We rely upon them very much for making this a case which this Court should decide, rather than leaving at the usual level of the Full Court. May it please your Honours.

McHUGH J: Yes, the Court need not hear you, Mr Shaw.

Having regard to the way in which the issues were identified and fought in the courts below this is not a suitable vehicle to consider the general questions about the operation of the mutuality principle and income tax law which the applicant seeks to agitate. On the particular issues that were fought and determined in the courts below the applicant would enjoy insufficient prospects of success to warrant a grant of special leave to appeal.

Accordingly, special leave is refused with costs.

AT 10.54 AM THE MATTER WAS CONCLUDED