Edited version of private ruling

Authorisation Number: 1011481167712

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Ruling

Subject: Non-assessable non-exempt income pursuant to section 59-35 of the Income Tax Assessment Act 1997

Question 1

Are receipts derived by the Rulee from mutual dealings with its member's non-assessable non-exempt income pursuant to section 59-35 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Relevant facts and circumstances

The Rulee is an incorporated association.

The Rulee's Constitution contains a dissolution clause and a non-profit clause preventing distribution to its members.

The Rulee's objects and purposes are set out in the Rulee's Constitution.

Membership of the Rulee is open to persons in a particular occupation. Membership entitles members to representation and to a range of benefits and member services.

In pursuing its objects and purposes, the Rulee derives income from members (membership subscriptions) and from external sources.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-15(3)

Income Tax Assessment Act 1997 section 59-35

Question 1Summary

The membership subscriptions are non-assessable non-exempt income pursuant to section 59-35 of the ITAA 1997 and, as provided by subsection 6-15(3) of the ITAA 1997, will not form a part of the assessable income of the Rulee. Similarly, other amounts derived by the Rulee from its members that are mutual receipts will be non-assessable non-exempt income pursuant to section 59-35 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts, which is called 'ordinary income'.

Subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income, it is not assessable income.

Under section 59-35 of the ITAA 1997 ordinary income is treated as non-assessable non-exempt income if it would have been a mutual receipt but for the entity's constituent document preventing the entity from making any distribution to its members, and it would have been assessable only because of section 6-5 of the ITAA 1997.

The principle of mutuality is based on the proposition that an organisation cannot derive income from itself. The principle provides that where a number of persons contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income.

The characteristics of organisations that can access mutuality typically include organisations carried on for the benefit of their members collectively where the members share a common purpose and that purpose is the purpose for which the organisation was established and is operated. There is a common fund that the members contribute to and which is applied for the collective benefit of all members who have ownership and control of the fund. The contributors to the common fund must be entitled to participate in any surplus of the common fund.

As a result of the mutuality principle, receipts derived by an organisation from mutual dealings with its members are not assessable income. Such receipts are called mutual receipts. The principle of mutuality does not however apply to dealings between an organisation and its members that go beyond a mutual arrangement and are in the nature of trade.

· Mutual receipts include:

· member subscriptions and levies

· fees from members using the organisation's facilities (for example, gyms, pools and squash courts)

· drinks and food sold by the organisation to members

· amounts members pay to attend dinners, parties, dances or social functions organised by the organisation

· amounts members pay to attend a talk, workshop or presentation organised by the organisation

The Rulee is a non-profit organisation carried on for the benefit of its members who are coming together for a common purpose, being the purpose/objects for which the Rulee has been established. All objectives of the Rulee aim to achieve a common benefit in which all members participate. The Rulee derives amounts from its members that are membership subscriptions.

The membership subscriptions received by the Rulee from its members would be mutual receipts but for the Rulee's Constitution preventing the Rulee from making any distribution to its members; and the membership subscriptions would be assessable income of the Rulee only because of section 6-5 of the ITAA 1997. The membership subscriptions are therefore non-assessable non-exempt income pursuant to section 59-35 of the ITAA 1997 and, as provided by subsection 6-15(3) of the ITAA 1997, will not form a part of the assessable income of the Rulee. Similarly, other amounts derived by the Rulee from its members that are mutual receipts will be non-assessable non-exempt income pursuant to section 59-35 of the ITAA 1997.

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