The bulk of this month's column covers some of the key concepts of the mutuality principle, which was established through case law and affects how taxable NFPs assess their taxable income. This is very topical with many taxable NFPs needing to lodge their income tax returns by 15 May.
Before we dive in, it helps to understand why some NFP organisations are taxable. Often, this is because the organisation isn’t registered as a charity, its purpose doesn’t fall within an income tax exempt category, or it hasn’t been endorsed by the ATO as income tax exempt following charity registration.
Common examples of taxable NFPs include member-focused clubs and societies, such as recreational fishing or car clubs; certain professional and trade associations; clubs whose main purpose is providing hospitality services for members; and social clubs primarily established for social interaction rather than broader community benefit.
Under the mutuality principle, some income a taxable NFP receives from its members doesn’t count towards its taxable income. That’s because the money is raised for the shared benefit of members and then used for that very purpose. In plain terms, an organisation can’t make a profit from itself. While there are a few concepts to get your head around, a quick tour of the guidance on our website will show how it all comes together.
But before getting into the mutuality principle in more detail, I'll start with a couple of updates relevant to all NFPs.
Applications open for new Stewardship Group members
We’re inviting nominations from NFPs and their representatives to help shape the administration of tax and super as members of our Not-for-profit Stewardship Group (NFPSG). Regular readers of this column will remember previous times that I've discussed meeting with the NFPSG, and the contributions of this group help guide our work. I really value the group's dedication and input to our discussions, and support sharing information through their networks. If you're interested in joining the group, please submit your nomination by 31 May. See Nominate for our Not-for-profit Stewardship Group for more information about the role and how to apply.
NFP news goes bimonthly
We're shifting to a bimonthly schedule for NFP news, with the next edition of NFP News to be issued in June. This timing means we can focus more on case studies, examples and in-depth explorations of topics in our articles.
We’ll usually publish news articles close to when Not-for-profit news will go out, but in some cases we may publish articles in advance to make the information available early for those looking for it. If you’d like notification when articles are published, you can subscribe to receive ATO site updates by email. This lets you choose daily, weekly or monthly email updates when new content is added to the Not-for-profit pages on our website, including Not-for-profit news articles.
We will continue to release NFP news by email. If you're not already subscribed, please sign up at our newsletter subscriptionsExternal Link page. Each edition contains useful links and alerts to other content on our site that you won't get just by reading the articles from our newsroom.
An introduction to the mutuality principle
A few people have been in touch with us to ask for more support understanding mutuality and taxable income for taxable NFPs. For those unfamiliar with the topic, the mutuality principle is a legal principle established by case law.
Essentially, income from mutual dealings with members is excluded from assessable income, as the organisation is managing a common fund for its members rather than generating profit. An example of this is charging members a membership fee that is then used for the benefit of the members, such as by renting the venue where members meet.
The flip side of this is that any expenses related to these mutual dealings are not deductible. For example, the cost of creating a membership card given to members who have paid the membership fee is not deductible.
Our mutuality guide
If you aren’t already aware, we have an extensive guide on this topic at Mutuality and taxable income for not-for-profits. It steps through the detail and practical application of mutuality. In fact, it goes into so much depth that some people have wondered whether it only applies to larger or more complex NFPs. Rest assured, the guide is relevant to taxable NFPs of all sizes! If you’re a financial officer, tax professional or other person involved in the administration of a taxable NFP organisation, this guide is for you.
You can find out more about the organisations that can access mutuality under the ‘Organisations that can access mutuality’ heading in the Taxable income and mutuality guide.
This column offers a brief introduction to some of the issues covered in the guide, to help you get your bearings. The guide itself goes much further, including aspects of mutuality I don’t even have space to touch on here, so it’s well worth reading as your next step.
The impact of mutuality on taxable income
So how does mutuality impact a taxable NFP's taxable income? To start off with, the taxable income of a club, society or association is calculated in the same way as a company for tax purposes: taxable income = assessable income – allowable deductions.
As income from mutual dealings with members of your organisation is not assessable income, you will need to begin by identifying whether a person is a member of your organisation. Generally speaking, a member of an organisation has done all of the following:
- applied for membership
- been accepted by the organisation
- paid the appropriate membership subscription.
Mutual dealings
You will then need to confirm that the income came from mutual dealings. A mutual arrangement exists where members contribute to a common fund and benefit from it collectively.
Not all dealings involving members are mutual dealings. For example, where a member pays a fee to rent a venue from the organisation and then keeps any profit from running events at the venue, mutuality would cease to apply. They have individually made a payment and then benefited from the use of that asset for their own purposes.
Assessable, non-assessable and apportioned income
Income from mutual dealings is non-assessable, and other income is assessable. Sometimes you may have both assessable and non-assessable income from the same event. For example, bar sales to members may be non-assessable income but sales to non-members may be assessable income. You will need to apportion the income to each category.
Once you've classified your income, you can look at the expenses. Generally, expenses incurred for non-assessable income are not deductible, while you can deduct expenses for assessable income. For apportionable income you can also apportion the expenses.
Ensuring that your organisation has appropriate processes, procedures and record keeping will make this a smooth and successful task.
You can find detailed guidance for all of the above at Classifying revenue, Classifying expenses and Separating apportionable items.
Calculating taxable income
After categorising your income and expenses, you can total the assessable income and the deductible expenses to calculate the taxable income. As a reminder, taxable income = assessable income – allowable deductions.
You can learn more about lodgement and payment in this month's NFP news at Reminder: income tax returns due soon for taxable NFPs or on our website at Taxable NFP organisations.
More information
As part of our mutuality guide, we have two detailed case studies to walk you through the process. You can find them at calculating taxable income.
For information on how to complete the company tax return, including a worked example that uses the figures from Case study 2, see Company tax return guide for not-for-profits.
Best regards
Tom