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Edited version of private ruling
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Ruling
Subject: Business Income
Question
Does the receipt of a one-off lump sum payment to extinguish lot entitlements constitute assessable income?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You (a body corporate) issue levies to your proprietors in proportion to their lot entitlements.
One of the owners is looking to extinguish some lot entitlements attached to their development.
You agree to this on the basis that the owner pays a one-off lump sum payment equivalent to the body corporate levies that would have been paid on the extinguished lot entitlements, into perpetuity.
After this transaction, the owner will not be liable to any more body corporate fees or special levies on the extinguished lot entitlements.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2) and
Income Tax Assessment Act 1997 Section 6-10.
Reasons for decision
Summary
It is considered that the principle of mutuality would apply to this situation. As such, the receipt of the one-off lump sum payment does not constitute assessable income.
Detailed reasoning
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Under section 6-10 of the ITAA 1997, assessable income also includes statutory income.
The Commissioner's view on the assessability of money received by a body corporate is set out in Taxation Ruling IT 2505. The assessability of moneys received in respect of the common property varies according to the relevant State strata title legislation.
As per paragraph 14 of IT 2505, the fees paid by the proprietors to the body corporate are not assessable due to the principle of mutuality.
The principle of mutuality applies when a number of persons, associate together for a common purpose, contribute to a common fund in which all are interested. The principle of mutuality recognises that one cannot make a profit out of oneself and that income can only be derived from sources from outside oneself. This principle does not extend to include income that is derived from sources outside that group.
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).
For mutuality to apply there must be complete identity between the contributors to the fund and the participants in the surplus (Municipal Mutual Insurance Ltd v. Hills (1932) 16 T.C. 430). This does not mean there must be individual identity between contributors and participants, but in the identity as a class. At any given moment in time the persons who are contributing must be identical to the persons who are entitled to participate (Faulconbridge v. National Employers' Mutual General Insurance Association Ltd (1952) 33 T.C. 103).
The Court in Federal Commissioner of Taxation v. Australian Music Traders Association (1990) 90 ATC 4536 supported the principle that there must be a reasonable relationship between contributions and benefits.
The mutual income of a body corporate includes amounts of subscriptions or levies imposed by the body corporate to enable it to carry out functions on behalf of its members. These functions are mainly to manage and administer the common property, to maintain and repair the common property and to insure the buildings and common property.
In your case, a property developer wants to extinguish some lot entitlements. As stated above, IT 2505 highlights that fees paid to the body corporate are not assessable income due to the principle of mutuality.
Although you will be receiving the body corporate fees as a one-off lump sum payment, it will still maintain the same character of the periodic payments that it replaces.
Therefore the principle of mutuality would apply to this situation and as such the receipt of the one-off lump sum payment does not constitute assessable income.
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