Edited version of private ruling

Authorisation Number: 1011645890589

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Ruling

Subject: Mutuality

Question 1

Can the membership fees received by the entity be excluded from its taxable income?

Yes

Question 2

Can the donations received by the entity be excluded from its taxable income?

Yes

Question 3

Can event income received by the entity be excluded from its taxable income?

Yes, however income from events will need to be apportioned so that only non member receipts are assessable.

Question 4

Can event expenses incurred by the entity be excluded from expenses claimed?

Yes, however the expenses for events will need to be apportioned so that only non member expenses are claimed.

This ruling applies for the following period

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2007

Relevant facts

The entity is an organisation dedicated to helping the communities of an area in a foreign country through community based health, education and conservation programmes. 

The entity is not endorsed as a tax concession charity or a deductible gift recipient.

The entity's objectives include providing improved access to health, education and community infrastructure to a remote community.

The entity has adopted the model rules for associations incorporated under the Associations Incorporations Act 1984.

Amendments to the model rules include the insertion of a suitable non profit and dissolution clause.

Apart from membership fees, the organisation raises money through donations and fundraising events.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 6-5

Income Tax Assessment Act 1997 - Section 59-35

Reasons for decision

Issue 1

Question 1

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Whether a receipt is income depends upon its quality in the hands of the recipient (Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 at 526; 40 ALJR 205 at 210-211; [1967] ALR 561 at 569-570; International Pipe Coaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124 at 136; 21 ATR 1 at 6; 90 ATC 4413 at 4419.

The Mutuality Principle

The mutuality principle is a legal principle established by case law. It is based on the proposition that an organisation cannot derive income from itself.

Broadly, the principle provides that where members of a group are found to be dealing with each other on a mutual basis, their contributions to the mutual concern will not be assessable income of the entity undertaking the group's activities nor will a surplus on the operation when returned to the members be assessable income in the members hands (Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334; Sydney Water Board Employees Credit Union v. FCT (1973) 73 ATC 4129); (1973) 4 ATR 157; (1968) 18 TBRD Case T 55).

In Sydney Water Board Employees Credit Union v. Federal Commissioner of Taxation (1973) 129 CLR 446 at 450; 4 ATR 157 at 158; 73 ATC 4129 at 4131, Barwick CJ said that the description 'mutuality principle', is used, unfortunately in his Honour's opinion to express the reason for the conclusion that the return to a taxpayer contributed after the fund has been used for a purpose agreed between the contributors, is not income. What distinguishes the amount refunded in such circumstances from profit or income is that the payment is made out of moneys which are in substance the moneys of the contributors.

Similarly, Mason J (with whose judgment Menzies, Walsh and Stephen JJ agreed) said (at CLR 454; ATR 161; ATC 4133-4134) that according to the mutuality principle, when a group of persons subscribe to a common fund for a common purpose, a return to the contributors of surplus contributions, that is, money in excess of what is required for the common purpose, does not constitute assessable income in their hands. A refund to contributors of part of their own money which they had overpaid is not 'income' in the hands of the recipients in the ordinary sense of that word.

The authorities establish that the mutuality principle is not confined in its operations to the situation in which the surplus contributions made by a contributor to a common fund are returned to the contributor.

In Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334, the receipt by a social club of annual subscriptions from its members was held not to be income of the club even though, for tax purposes, the club was a separate entity from its members. Griffith CJ held (at 337) that the contributors were, in substance, advances of capital for a common purpose which were expected to be exhausted in the year in which they were paid. They were not income of the club any more than calls made by members of the company upon their shares are income of the company.

In North Ryde RSL Community Club Ltd v. Federal Commissioner of Taxation (2002) 121 FCR 1 at 13; 49 ATR 579 at 589-590; 2002 ATC 4293 at 4303, the Full Court (Spender, Finn and Merkel JJ) said that it is 'well enough established' that the mutuality principle, in addition to applying to refunds of contributions made to a common fund, may also apply to contributions made and distributions received where the persons who associate for a common purpose and contribute to a common fund have incorporated to effectuate their common purpose, provided the company can properly be treated as an entity for their convenience. In such cases, the fact of incorporation is irrelevant: Revesby Credit Union Co-operative Ltd v. Federal Commissioner of Taxation (1965) 112 CLR 564 at 574; 38 ALJD 358 at 361; [1965] ALR 752 at 757.

The characteristics of organisations that can access mutuality typically include:

· The organisation is carried on for the benefit of its members collectively, not individually

· The members of the organisation share a common purpose in which they all participate or are entitled to do so

· The main purpose for which the organisation was established and is operated, is the common purpose of the members

· There is a common fund that gives effect to the common purpose and all the members contribute to it

· All the contributions to the common fund are applied for the collective benefit of all the members, in line with the common purpose

· Different classes of membership may exist with varying subscription rates, rights and entitlements to facilities

· The members have ownership and control of the common fund, and

· The contributors to the common fund must be entitled to participate in any surplus of the common fund (It should be noted that section 59-35 of the ITAA 1997 was enacted applicable to income years after 30 June 2000 to ensure that not for profit organisations are not disadvantaged by this requirement).

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 distributions to its members, and it would have been assessable only because of section 6-5 of the ITAA 1997.

As a result of the mutuality principle:

· All receipts derived from mutual dealings with members are not assessable income; and

· Expenses incurred to get mutual receipts are not deductible

There are exceptions to the mutuality principle where receipts from members may constitute income for the purpose of section 6-5 of the ITAA 1997.

The principle will not apply to activities that are considered to be in the nature of trade (that is, carrying on a business). Nor will it apply where there is a distinct disparity between the identity of the contributors and the recipients of any surplus.

The definition of 'business' under tax law includes 'a trade'. The terms 'business' and 'trade' are commonly used to refer to activities that are commercial in nature and intended to produce a profit.

In a mutual arrangement there must also be complete identity between contributors and participants as a class, not individually, in the surplus of the common funds. The members collectively contribute and collectively benefit from the common fund.

For the purpose of mutuality, we accept that a person is a member of an organisation where the person has:

· applied for membership (which may entail being nominated and paying the appropriate nomination fee);

· been accepted by the organisation (for example by the Board of Directors); and

· paid the appropriate membership subscription.

The entity is an organisation comprised of a group of members that carry out various fundraising activities in order to raise funds that are used to improve the life of people living in a remote area.

Mutual associations are commonly considered to be organisations where members associate for their common use of facilities, such as social clubs or sporting clubs. However, common purpose is not limited to hedonism or a purpose that involves self interest. Altruism or political and lobbying purposes may also be common purposes of mutual societies or associations.

The member subscriptions paid by the members of the entity are not in the nature of trade and there is nothing in the constitution or nature of the transactions to suggest that any of the characteristics of a mutual organisation as outlined above have not been met.

On that basis, the entity meets all the requirements for the mutuality principle to apply.

Consequently the membership fees received from its members is not assessable income.

Question 2

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Taxation Ruling IT 2674 examines whether gifts or voluntary payments received by church workers are assessable income.  These principles are no different from those which apply in determining whether gifts received by other taxpayers are assessable income.

Taxation Ruling TR 2005/13 provides principles relevant to the determination of whether a transfer of money or property constitutes a gift. The term 'gift' is not defined in the ITAA 1997. Therefore, the word 'gift' takes its ordinary meaning.

Rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:

· There is a transfer of the beneficial interest in property

· The transfer is made voluntarily

· The transfer arises by way of benefaction, and

· No material benefit or advantage is received by the giver by way of return.

IT 2674 provides that whether a gift is assessable income depends on the character of the gift in the hands of the recipient. Consideration is necessary of the whole of the circumstances in which the gift is received.

The general principle outlined under IT 2674 (as stated at paragraph 20) is that gifts given voluntarily and which are not related to any income producing activity on the part of the recipient is not assessable income of the recipient.

In this case, regardless of whether the donations are made by members or non members, they will not be assessable income. There is no evidence to indicate the donations are not given voluntarily nor that they relate to income from rendering personal services, income from property or income from the carrying on of trading activities.

Question 3

Mutual receipts also include amounts members pay to attend events such as dinners, parties, dances or social functions of the organisation. Amounts paid by members to attend these events is not ordinary income nor is it an amount specified under income tax law as income (that is, statutory income).

Where amounts are paid by both members and non members to attend events such as dinners, parties, dances or social functions, then that income is considered to be apportionable revenue.

This is because it comprises both assessable income (non member receipts) and non assessable income (member receipts).

The income can be apportioned using any of the methods outlined in pages 31 to 35 of the Guide for taxable non profit organisations - Mutuality and Taxable Income.

Question 4

Where an organisation's income has been apportioned to take into account receipts from members and non members (that is, assessable and non assessable income), then the organisations expenditure must also be apportioned between receipts received from members and receipts received from non members (Carlisle and Silloth Golf Club v. Smith (1912) 6 TC 48).

Any expenses associated with events will also need to be apportioned on the same basis that the income derived from events is apportioned.

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