Edited version of private ruling

Authorisation Number: 1011501262276

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Ruling

Subject: Whether receipts in the form of fees received by the Applicant from its Members will be assessable income under Division 6 of the Income tax Assessment Act 1997.

WHAT THIS RULING IS ABOUT:

Are amounts received from members, mutual income and not assessable income in terms of section 6-1, 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

THE SUBJECT OF THE RULING:

The taxpayer is a company incorporated in Australia. The company underwent a restructure which resulted in:

· a change in shareholding structure;

· a new constitution and by-laws; and

· a change in activities.

The company holds a brand name and licences that name to its shareholders/members. Members run businesses and use the brand name in their business name.

The company is responsible for growing the national brand for member entities by activities such as co-ordinating and enabling uniform standards of service by all members. In addition the company provides a range of member services, including co-ordination of purchasing advantages for members, development and adoption of common operating systems and development of risk management procedures. The company only provides services to members.

Currently there are X number of members in the company, each holding one ordinary share. In respect of operating members, fees are payable based on the size of the office, with 4 tiers currently applying. Each member pays fees dependent on its size classification hence the fee structure represents a user pays system. Regardless of the contribution made by a member, all members have access to the same range of services from the company.

The total fees payable by members in a year is determined on a cost recovery basis. Where costs are incurred by the company in respect of specific members, those costs are recovered from those members. The majority of costs incurred relate to benefits for all members and are recovered from members using the 4 tier fee structure. Amounts received for projects, dues received, renewal fees and the bulk of other income fall into this later category.

Income for the company is exclusively from cost recovery from members. There is no income from outside parties and the company does not invoice outside parties or perform services for outside parties.

Upon dissolution of the company, any surplus funds will be paid to its members.

COMMENCEMENT OF ARRANGEMENT:

1 July 1010

RULING:

Does the principle of "mutuality" apply to the amounts received from Members and, only receipts received from non-member sources will be subject to income tax in Australia under Sections 6-1, 6-5 or 6-10 of the 1997 Act?

Answer: Yes

EXPLANATION: (This does not form part of the Notice of Private Ruling).

Summary

The principle of "mutuality" applies to the receipts received from members. The receipts from non-members are assessable income under Division 6 of the Income Tax assessment Act 1997.

Detailed Reasoning

Division 6 of the ITAA 1997 sets out what is assessable income for the purposes of the ITAA 1997. Section 6-1 gives a general outline of the division, section 6-5 includes income according to ordinary concepts in assessable income and section 6 - 10, includes statutory income in assessable income. Mutual income does not constitute assessable income under any section of the ITAA 1997.

Taxation ruling IT2505 at paragraph 14 sets out that the principle of mutuality which recognises that one cannot make a profit out of oneself and that income can only be derived from sources outside oneself.

It goes on to say:

· 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 cardinal requirement for the principal to apply is that there be complete identity between the contributors and the participants in the surplus (Municipal Mutual Insurance v Hills (1932) 16 T.C. 430) not in the sense of individual identity but in the sense of identity as a class" so that at any time the persons who are contributing must be identical with the persons who are entitled to participate" (Faulconbridge v National Employers' Mutual General Insurance Association Ltd (1952) 33 T.C. 103 at page 125).

The Mutuality principle may still apply notwithstanding that the entity is a corporation. This is because the corporation is merely an entity that is used for the benefit of its members (Royal Automobile Club of Victoria v FC of T4 ATR 567; 73 ATC 4153).

In this case the income of the company consists of contribution from the members of the company for costs incurred by the company on behalf of the businesses run by the members.

The persons contributing to the entity are shareholders of the company and are entitled to any distribution in the event of dissolution fees paid by the members to the company are mutual receipts of the company and should not be included in the assessable income of the company under Division 6 of the ITAA 1997.

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