ATO Interpretative Decision
ATO ID 2006/325
Income Tax
Consolidated Group: mutuality principleFOI status: may be released
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This ATO ID has been amended to insert further explanatory paragraphs at the conclusion of the Reasons for Decision.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where mutuality applies to the head entity of a consolidated group, are insurance premiums received by an insurance company which is a member of that group, but not itself a mutual entity, mutual receipts?
Decision
No. The insurance premiums are not mutual receipts.
Facts
Head Co is the head company of a consolidated group of which Insurance Ltd is a member.
Head Co is an unlisted public company which is limited by guarantee. It does not have shareholders and its members are a particular industry group. Head Co claims it is an entity to which the principle of mutuality has applied.
Insurance Ltd is a licensed insurer incorporated overseas but has its central management and control in Australia and is a general insurance company for the purposes of Division 321 of Schedule 2J of the Income Tax Assessment Act 1936 (ITAA 1936). It is a company limited by shares 100% owned by Head Co. Insurance Ltd sells professional indemnity insurance to both members and non-members of Head Co. The approximate proportion of policyholders that are members and non-members is 75% to 25%.
Reasons for Decision
One of the primary indicia of mutual receipts is whether they are included in the common fund of the entity and subject to the reasonable relationship principle.
Insurance Ltd's premiums were received under insurance contracts. As this is a commercial arrangement the receipt of the premiums is not attributable to the membership interests in a common fund, the premiums are not mutual receipts.
The decision of the High Court of Australia in Sydney Water Board Employees' Credit Union Ltd v. Federal Commissioner of Taxation (1973) 129 CLR 446; 73 ATC 4129; (1973) 4 ATR 157 (the Sydney Water Board Case) provides the authority for this conclusion.
In this case the taxpayer contended that the mutuality principle applied where interest paid to it by members on moneys borrowed from the taxpayer, was not assessable income in its hands. The company's rules indicated that any surplus resulting from the taxpayer's operations or any rebate of interest paid during a financial year shall only be made to members who had obtained loans from the company.
Having regard to the relationship which existed between taxpayer and its borrowing members and the nature of the transactions, it was apparent that the mutuality principle had no application. The taxpayer lent money to members under individual contracts of loan by which the borrowers were bound to pay the stipulated interest to taxpayer for its benefit. The taxpayer borrowed money from its members under individual contracts of loan by which it was bound to pay interest to them.
The Sydney Water Board Case provides support for the view that where there is insufficient identity between contributors and participators in a distribution of surplus, the mutuality principle will not apply. Also, the distribution of surplus in this case resulted from the taxpayer's use of its general funds and did not constitute payment from a common fund.
Although Head Co is a mutual entity the insurance business of Insurance Ltd is not part of Head Co members' common fund. The surplus of funds from Insurance Ltd arises from the contractual relationship between Insurance Ltd and its policy holders rather than the reasonable relationship between Head Co and its members.
Application of this ATO ID from 1 July 2010
From 1 July 2010, the Tax Laws Amendment (Transfer of Provisions) Act 2010 repealed Schedule 2J of the ITAA 1936 and rewrote those provisions into Division 321 of the ITAA 1997. The wording and format was altered to adhere to the drafting approach taken in the ITAA 1997, but as outlined in Chapter 6 of the Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Bill 2010, there has been no change in meaning of the rewritten provisions.
Therefore, from 1 July 2010, all references to Schedule 2J of the ITAA 1936 should be read as referring to Division 321 of the ITAA 1997.
Date of decision: 24 November 2006Year of income: Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008
Legislative References:
Income Tax Assessment Act 1997
Division 321
section 321-45
section 701-1
Schedule 2J
section 321-45 Tax Laws Amendment (2005 Measures No.6) Act 2006
the Act New Business Tax System (Consolidation and Other Measures) Act (No.1) 2002
the Act
Case References:
Sydney Water Board Employees Credit Union Ltd v. Federal Commissioner of Taxation
(1973) 129 CLR 446
73 ATC 4129
(1973) 4 ATR 157
Related Public Rulings (including Determinations)
TR
2004/5
TR
2004/11
TD 1999/38
TD 93/194
Other References:
Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill 2002
Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Bill 2010
Keywords
Consolidation
General insurance
Insurance income
Member of a group
Mutuality principle
Professional indemnity insurance
Single entity rule
ISSN: 1445-2782