ATO Interpretative Decision

ATO ID 2001/232 (Withdrawn)

Income Tax/Goods and services tax

• This ATO ID has been withdrawn from the database as it has now been included as an example in Mutuality and taxable income which is on the Schedule of Documents Containing Precedential ATO Views.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is rent received from a club member assessable income of the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes, the rent received by the taxpayer, a club, does form part of the assessable income under section 6-5 of the ITAA 1997.

Facts

The taxpayer an incorporated club owns two factory units, one of which is used for club activities and the other is rented to a club member.

The rules of the taxpayer prohibit any surplus to be distributed to its members.

Reasons for Decision

The principle of mutuality is based on the proposition that a taxpayer cannot derive income from itself. In the case of corporate entities, the principle recognises that contributions by proprietors are not in the nature of income because 'income consists of moneys derived from sources outside' of the taxpayer (The Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334 at 337).

However, there are exceptions to this principle and some receipts from members may constitute income for the purpose of the ITAA 1997, section 6-5. For example, the principle will not apply to activities that are considered to be in the nature of trade as opposed to a mutual activity.

This exception was best explained by Lord MacMillan in the case Inland Revenue Commissioners v. Ayrshire Employers Mutual Insurance Association Ltd (1946) 1 All ER 637 at 640 when he said: 'It is not membership or non-membership which determines immunity from or liability to tax; it is the nature of the transactions.'

Consequently, the question that must be posed to the taxpayer is: 'Is the activity, on the one hand, a trade, or an adventure in the nature of trade, producing a profit, or is it, on the other, a mutual arrangement which, at most, gives rise to a surplus?' (Fletcher v. ITC (1971) 3 All ER 1185). The taxpayer's activity involves the leasing of a factory unit to one club member. This activity is considered of a business nature rather than a mutual arrangement and would be fully assessable under ITAA 1997, section 6-5. The arrangement goes beyond a mutual arrangement and is in the nature of trade. Consequently, the income from the rental arrangement with the club member will form part of the assessable income of the taxpayer under the ITAA 1997, section 6-5.

Legislative References:
Income Tax Assessment Act 1997
   section 6-5

Case References:
Bohemians Club v. Acting Federal Commissioner of Taxation
   (1918) 24 CLR 334
   (1918) 24 ArgLR 92
   [1918] VLR 234

Related ATO Interpretative Decisions
ATO ID 2001/231

Keywords
Mutuality principle
Sports clubs
Rental property income

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  21 August 2001

ISSN: 1445-2782