Please note: This is an extract from Hansard only. Hansard extracts are reproduced with permission from the Parliament of Western Australia.
House: Legislative Assembly- Introduction and First Reading
Date: Wednesday, 20 October 2004
PDF of this document.
Member: LOGAN
Subject: LOANS (CO-OPERATIVE COMPANIES) BILL 2004
Page: 6944b - 6945a / 1
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LOANS (CO-OPERATIVE COMPANIES) BILL 2004
Introduction and First Reading
Bill introduced, on motion by Mr F.M. Logan (Parliamentary Secretary), and read
a first time.
Explanatory memorandum presented by the parliamentary secretary.
Second Reading
MR F.M. LOGAN (Cockburn - Parliamentary Secretary) [12.44 pm]: I move -
That the Bill be now read a second time.
The purpose of the Loans (Co-Operative Companies) Bill 2004 is to establish
a scheme enabling loans to be made by the Government to Western Australian eligible
cooperative companies. Such companies meet requirements set out in section 120(1)(c)
of the commonwealth Income Tax Assessment Act 1936.
Section 120(1)(c) of the Income Tax Assessment Act relates to cooperative companies
with shares representing not less than 90 per cent of the value of the company
being held by persons who supply the company with commodities or animals that
the company requires for the purposes of its business. For such businesses,
repayment of loans are allowable income tax deductions if the moneys are loaned
to the company by “a Government of the Commonwealth or a State”. A
loan from any other source does not qualify for this deduction. A loan must
be specifically to enable the cooperative company to acquire assets that are
required for the purpose of carrying on the business of the cooperative.
Queensland, New South Wales and Victoria have operated this type of scheme for many years. Cooperatives in those States have benefited from the section 120 deductions that, in practice, amount to a 30 per cent discount on capital costs for eligible cooperatives. This has improved the feasibility of value-adding projects and resulted in significant new investment in production facilities in the other States.
Introduction of this scheme will overcome the disadvantage that Western Australian cooperatives experience compared with similar companies in the eastern States. The Western Australian agricultural sector is facing the pressure of globalisation in the food industry. Producers find that their market power is diminishing as they struggle to achieve sustainability for both the enterprises that they operate and the communities in which they live. With the emergence of a smaller number of mega participants such as retailers, manufacturers, financial institutions and transport companies in the supply chain, global purchasing is becoming a reality. Many stakeholders in the agricultural sector have to rationalise their activities in order to provide not only the scale and quality of output required but also the reliability of supply demanded by these large participants. In response, many producers are developing initiatives to strengthen their relationships with members of the supply chain and are banding together to generate investment in projects through cooperatives.
A cooperative is a democratic organisation that is owned and controlled by the people it serves and who are joined together for a common benefit. Cooperatives may be formed to provide goods or services to members or to supply goods or services to the general public. Cooperatives are a strategy that producers are using or may use to recapture control of processing and marketing of their primary produce. By coming together under a cooperative structure, producers can become vertically integrated in the next stages of the supply chain, especially value adding.
Western Australia has approximately 55 cooperatives, with the majority being involved in either rural retailing or processing and marketing primary production. In relation to primary production, dairy, meat, grains and fisheries are the largest sectors. Only cooperatives involved in processing and marketing are eligible to gain benefit from a section 120(1) loan facility. Virtually all of these are rural commodity or fishery based. Consultation with industry suggests that there is interest in this facility for a requirement of $35 million over four to five years. In the longer term, the demand for this facility could grow to $100 million. The minister has already received several written expressions of interest.
New cooperatives are being considered in the olive, wine, timber and wool industries and may be interested to use the loan facility to service their capital funding needs. Additionally, the establishment of a loan facility provides attractive options for the creation of cooperative entities to replace statutory marketing authorities. The Income Tax Assessment Act provisions allow for a loan from government to be used to pay for assets acquired by the cooperative company to carry out its business and which the company has taken over from the Government.
The mechanism for the scheme is as follows: the minister responsible for agriculture, with the concurrence of the Treasurer, borrows moneys required to give effect to the scheme from the Western Australian Treasury Corporation. The borrowed moneys are credited to the consolidated fund. The moneys are appropriated to the trust account established for the purpose of the scheme. The minister uses the borrowed moneys to make loans on behalf of the Government to eligible cooperatives. The loans are administered by the Department of Agriculture. This mechanism demonstrates that loans under this scheme are clearly from the Government.
The Western Australian Treasury Corporation under its legislation may lend under a written law. This Bill provides the authority for the minister, on behalf of the Government, to borrow from the WATC and also enables the operations of the scheme.
The criteria specifying eligible cooperative companies are very clearly stated in the Income Tax Assessment Act 1936. Under section 120(1)(c) the loan must be sourced from a Government of the Commonwealth or a State. Section 120(1)(c) requires compliance with sections 117 and 118 of the Act. These sections restrict what constitutes an eligible cooperative for the purposes of the Act. Sections 117 and 118 are summarised as follows: they limit the number of shares that may be held by, or on behalf of, any shareholder by providing that 90 per cent of the cooperative’s share capital must be held by active members; they prohibit the quoting of shares for sale or purchase at any stock exchange or in any public manner whatever; they provide that the cooperative must be established for the purpose of carrying on a business that has as its primary objective the “acquisition of commodities or animals from its shareholders for disposal or distribution”; and they provide that more than 90 per cent of a cooperative’s business must be done with its shareholders. Loans must be used to acquire assets that are required for the purpose of carrying on the business of the company.
Although providing this scheme, the Government will offer no advice as to the eligibility of a cooperative. In submitting an application for a loan, applicants must certify that they have sought independent advice as to the tax implications of a loan under the scheme and that eligibility advice has not been sought from nor given by the Government. The benefit from these loans is for cooperatives to take advantage of taxation concessions under section 120(1)(c) of the Income Tax Assessment Act. Should a cooperative lose its status under that section, there will be no benefit for the cooperative to continue to borrow under this facility, as it will be cheaper to have a commercial bank fund the loan.
In establishing this scheme, the Government is providing the means by which a Western Australian cooperative company may obtain significant financial benefit for the financing of new capital assets required for the expansion of its business. Indirectly, the proposal is of benefit to regional development in Western Australia. Many of the cooperatives likely to take advantage of this scheme are based in regional and rural areas. The multiplier effect of the dollars spent by the cooperative and its members in regional communities enhances the benefit of the commonwealth concession. Existence of this scheme gives opportunity and provides motivation for small businesses to consider new cooperative ventures.
The criteria set by Cabinet in approving the establishment of this scheme are that there will be no cost to Government, with all costs recovered from the borrowing cooperatives for administration of the scheme, and there will be no impact on net state debt. Additionally, all loans must be underwritten by an unconditional bank guarantee. Administrative arrangements have been set in place that satisfy these requirements. Interest will be the rate set by the Western Australian Treasury Corporation at the date of loan establishment plus an administrative fee set by the minister to recover full administration costs.
The Bill requires that security for each loan be by a guarantee of a kind approved by the Treasurer. The Department of Treasury and Finance has assessed that such an arrangement will have no impact on the Government’s credit rating. The loan liabilities owed by the State to fund the scheme would be fully offset by secured on-lending financial assets.
The Loans (Cooperative Companies) Bill 2004 provides the opportunity for eligible Western Australian cooperative companies to improve the feasibility for their capital expansion programs. It remedies disadvantage as compared with similar eastern States cooperatives. It is of considerable benefit to regional development in Western Australia, with the multiplier effect of dollars spent in regional communities enhancing the benefit of this commonwealth concession. It is at no cost to Government, and the State is fully protected from the risk of default by the cooperatives. I commend the Bill to the House.
Debate adjourned, on motion by Mr J.L. Bradshaw.
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