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Edited version of your private ruling
Authorisation Number: 1012526526314
Ruling
Subject: Mutuality principle
Question 1
To the extent that the income is mutual, will the appointment of common directors by Co-operative A and Co-operative B affect the character of mutual income received by Co-operative A?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
Structurally the two private co-operatives function together so that one owns and manages the infrastructure assets (Co-operative A) and one manages the Co-operative activities (Co-operative B).
Co-operative A collects fund levies from members which are used for maintenance and renewal of the assets.
The Applicant advised that for taxation purposes Co-operative A characterises the fund levies from members as mutual income.
The two co-operatives share the same members.
The Co-operatives' Rules includes that the majority of Directors must be member Directors and that only one Director of Co-operative A may also be a Director of Co-operative B.
The Applicant has advised that if a favourable ruling is provided the Rules of the co-operatives will be amended to allow common directors.
Relevant legislative provisions
Income Tax Assessment Act section 6-5
Income Tax Assessment Act section 6-10
Income Tax Assessment Act section 59-35
Reasons for decision
Summary
The existence of common directors on its own will not affect the characterisation of income under the mutuality principle.
Detailed reasoning
The ATO publication Mutuality and taxable income (NAT 73436) in discussing the mutuality principle states on page 7:
What is 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.
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 principle does not extend to include income that is derived from sources outside that group.
Mutual dealings
As a result of the mutuality principle:
· receipts derived from mutual dealings with members are not assessable income (these are called mutual receipts)
· expenses incurred to get mutual receipts are not deductible.
In considering the requirements for satisfying the mutuality principle Mutuality and taxable income states:
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 memberships may exist with varying subscription rates, rights and entitlements to facilities.
· The members have ownership and control of the common fund.
· The contributors to the common fund must be entitled to participate in any surplus of the common fund.
The appointment of common directors for both Co-operative A and B does not affect Co-operative's A ability to satisfy the characteristics listed above to access mutuality.
Accordingly the existence of common directors on its own will not affect the characterisation of income under the mutuality principle.
Other relevant comments
This ruling does not consider whether the Entity's income has the character of mutual income.
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