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Ruling

Subject: Assessable income

Question 1

Will membership fees paid by corporate members be assessable income of the Taxpayer pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will any other income tax provisions be triggered by the Arrangement?

Answer

Not ruled upon.

This ruling applies for the following periods:

Year ending 31 December 2013

Year ending 31 December 2014

Year ending 31 December 2015

The scheme commences on:

1 January 2013

Relevant facts and circumstances

The applicant has requested a private ruling in relation to the following:

The Commissioner of Taxation (the "Commissioner") is requested to make a written ruling on the way in which the Commissioner considers the provisions about tax (as defined in section 995-1 of the Income Tax Assessment Act 1997) would apply to the Taxpayer in relation to arrangements whereby a new class of members will be created to allow corporations to become members ("the Arrangement"), in addition to the current class of members.

The Taxpayer is an Australian Public Company Limited by Guarantee.

The Taxpayer wishes to admit a new class of members under its Constituent documents to allow corporations to become members.

No details regarding the rights and obligations of corporate members or other members of the Taxpayer have been provided.

To support their application the Taxpayer has supplied:

· The Memorandum and Articles of Association for the Taxpayer.

· The Rules and Constitution of an affiliated entity.

· A blank copy of the "Sponsorship proposal" which has been entered into by corporate members.

· The Rules and Constitution of the affiliated entity indicate that it is a member of the Taxpayer.

· The membership fees to which this ruling relates are the transactions set out in the terms and conditions of the Sponsorship proposal detailing the rights and obligations of corporate members.

Relevant legislative provisions

Income Tax Assessment Act 1997 6-5 and

Income Tax Assessment Act 1997 59-35.

Reasons for decision

Question 1

The issue in question is whether the mutuality principle will apply to exclude from assessable income receipts from corporate members paid to the Taxpayer for sponsorship packages described in the Sponsorship Proposal.

The principle of mutuality is not defined in the Income Tax Assessment Act 1997 (ITAA 1997). Consequently case law addressing this principle must be considered in order to ascertain its application to your circumstances.

The concept of mutuality was first enunciated in the case New York Life Insurance Co. v. Styles (1889) 14 App. Case 381 at 394 in which Lord Watson stated:

When a number of individuals agree to contribute funds for a common purpose, such as the payment of annuities, or of capital sums, to some or all of them, on the occurrence of events certain or uncertain, and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them, I cannot conceive why they should be regarded as traders, or why contributions returned to them should be regarded as profits. In my opinion, a member of the appellant company, when he pays a premium, makes a rateable contribution to a common fund, in which he and his co-partners are jointly interested, and which is divisible among them, at the times and under the conditions specified in their policies. He pays according to an estimate of the amount which will be required for the common benefit; if his contribution proves to be insufficient he must make good the deficiency; if it exceeds what is ultimately found to be requisite, the excess is returned to him. For these reasons I have come to the conclusion that the transactions of the appellant company, in so far as these relate to participating policies, do not constitute the carrying on of a trade, within the meaning of the Income Tax Acts, and that the surplus funds returned or credited to its members are not profits.

Effectively, the mutuality principle is based on the proposition that one cannot derive income from oneself. In the case of a corporate entity, 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 entity. In The Bohemians Club v. The Acting Federal Commissioner of Taxation (1918) 24 CLR 334, Griffith CJ of the High Court of Australia stated at 337-338 that:

A man is not the source of his own income, though in another sense his exertions may be so described. A man's income consists of moneys derived from sources outside himself. Contributions made by a person for expenditure in his business or otherwise for his own benefit cannot be regarded as his income.

However, some receipts from members may constitute income for the purpose of the ITAA 1997. The principle will not apply to activities that are considered in the nature of trade. Nor will it apply where there is a distinct disparity between the contributors and those able to participate in any surplus of those contributions.

The fact an association may be considered a mutual organisation for the purposes of the mutuality principle, and most of its income may be considered mutual in nature, will not prevent some of its income being excluded from the principle and assessed under ordinary concepts of income. A dealing between members is not conclusive of a mutual transaction.

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 that

It is not membership or non-membership which determines immunity from or liability to tax; it is the nature of the transactions.

So, the question that must be posed to your circumstances is whether the income received from the sponsorship program to the corporate members can be characterised as mutual transactions. Lord Wilberforce of the Privy Council in Fletcher v. Income Tax Commissioner [1971] 3 All ER 1185 at 1189 said that

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?

Your activities provided to the members will generally fall within the concept of mutuality and the receipts therefrom are not assessable as in The Bohemians Club v. The Acting Federal Commissioner of Taxation (supra) and Inland Revenue Commissioners v. Ayrshire Employers Mutual Insurance Association Ltd (supra).

However, we consider that the arrangement entered into with the corporate members for providing benefits as per your Sponsorship Program is not carried on a mutual basis. The transactions with corporate members are trading activities.

We consider that Fletcher v. Income Tax Commissioner (supra) applies to the receipts from corporate members. In Fletcher, a club provided bathing facilities and obtained subscriptions from members. The club had collected subscriptions plus an extra amount from its hotel members. The hotels bought tickets from the club and resold the tickets to the guests at cost. The Privy Council held that the dealings with the hotels were not undertaken on a mutual basis and so the receipts from the ticket sales were assessable. Lord Wilberforce of the Privy Council observed at 1190 and 1191 that:

Many clubs collect subscriptions of different amounts according to the use expected to be made of the facilities, or to age, or personal circumstances, and this is consistent with 'mutuality'. So here it was argued that the mere fact that the hotel members paid higher (much higher) contributions is not inconsistent with the club being a normal mutual club ... their Lordships cannot regard as decisive the mere fact that the hotels are described as 'members' and have rights of the same kind that other members have. It may not be an essential condition of mutuality that contributions to the fund and rights in it should be equal; but if mutuality is to have any meaning there must be a reasonable relationship, contemplated or in result, between what a member contributes and what, with due allowance for interim benefits of enjoyment, he may expect or be entitled to draw from the fund: between his liabilities and his rights.

In addition, we have also found support in FCT v Australian Music Traders Association 90 ATC 4536 in which the majority decision of the full Federal Court held that a payment to the association was not received on a mutual basis. The association comprised wholesalers of musical equipment and paraphernalia and arranged an annual fair where goods could be exhibited to potential customers. The association had clauses in the constitution to prohibit the distributions of surplus to members. In the year in question, the association contracted a professional organiser to arrange an exhibition. Space was rented to association members and non-members alike on a commercial basis and the association received a payment on the basis of the amount of space rented. Wilcox J at 4546 used the notion from Fletcher that there was no "reasonable relationship" between the individuals contributing to the fund and the participants in that fund.

We consider that your arrangement goes beyond a mutual concern and is in the nature of trade as the sponsorship programs provide benefits to the corporate members. There is no reasonable relationship between contributions and benefits. Therefore, the mutuality principle does not apply. Section 6-5 of the ITAA 1997 applies to the receipts from the sponsorships by the corporate members.

A Fund owned and controlled by members

In line with the reasoning above, it is not necessary to decide whether the common fund is owned and controlled by the members because no common fund exists. However, the following is considered for completeness. McTiernan J. explained in Revesby Credit Union, ownership and control of the common fund by the members is necessary in order for the mutuality principle to apply. Therefore, contributions must not become part of the general funds of the company to be expended as the company pleases; the contributions must retain their character as contributions to a common fund over which the contributors have rights.

This is most clearly demonstrated in the case of Sydney Water Board Employees' Credit Union Ltd v Federal Commissioner of Taxation 73 ATC 4129; 4 ATR 157 (Sydney Water) where Mason J concluded that the mutuality principle could not apply to interest paid by members to a credit union for several reasons, including the fact that the interest was paid by borrowers in discharge of a legal obligation to pay it, and that the receipts formed part of the general funds of the taxpayer to be dealt with as the credit union thought fit. Mason J. noted that the borrowing members did not have any right to a refund of part of the interest which they have paid; on the contrary,

"…the interest so paid forms part of the funds of the taxpayer… the borrowing members are entitled to participate in a distribution of the surplus which results from the taxpayer's use of the general funds."

Wilcox J made a similar finding in Music Traders:

"[T]his is not a case where the moneys received by the Association in respect of the exhibition is money held on behalf of individual members. The moneys became part of the general funds of the Association, to be dealt with as the members of the Association might see fit from time to time, but without any obligation to those members who had taken space at the 1984 exhibition."

Corporate members of the Taxpayer are required to pay fees depending on the sponsorship that they participate in. However, not all members are entitled to participate in the surplus on winding up.

No details have been provided in relation to rights of corporate members under your Constituent documents. Therefore it is assumed that the only recipients of any surplus under the Constituent document are the affiliated entities of the Taxpayer who are members under the Articles of the Taxpayer.

In the same way that the interest payments in Sydney Water were not contributions to a common fund that was owned and controlled by the members, the sponsorship package fees paid to the Taxpayer are not contributions to a common fund. The members in paying the fees are satisfying a legal obligation and they do not retain any rights over any surplus.

The fees are pooled with the Taxpayer's general funds and can only be returned as a distribution of assets upon winding up to members as provided in the Articles.

Accordingly, the fees are not contributions to a common fund, owned and controlled by its members, for a common purpose, the mutuality principle cannot apply. The transactions are in the nature of trade and amounts derived from those transactions are assessable income of the Taxpayer.

Question 2

Not ruled upon. In accordance with Paragraph 107 of Practice Statement Law Administration PS 2008/3 Provision of advice and guidance by the Australian Taxation Office, a private ruling request must state the relevant provision to which a ruling relates.

As you have requested whether any other provision applies to the arrangement outlined, we cannot rule. You have not requested an interpretation of the law in respect to a specific provision.

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