Edited version of private advice

Authorisation Number: 1051999725340

Date of advice: 28 June 2022

Ruling

Subject: Assessable income - non-assessable non-exempt

Question

Is the receipt by the Company of specified fees from members subject to the common law principle of mutuality, and not assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year of income ended 30 June 20XX

Year of income ended 30 June 20XX

Year of income ended 30 June 20XX

Year of income ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The members of the Company all operate within the same industry in Australia. The mutual co-operative synergy between members has been very beneficial and has facilitated the development and enhanced functionality of services provided by the Company.

Since incorporation, the Company has continually developed, acquired, enhanced, provided and supported services for the members of the Company.

The Company's members are all smaller entities within the industry who require a degree of 'pooling' of resources in order to provide effective competition with larger participants.

The services which are provided by the Company to its members is essential to the ability of these smaller entities to operate effectively in the competitive environment of the industry.

Funding Arrangements

On incorporation, the initial members of the Company contributed funds to the Company in equal proportions for the acquisition by the Company of the Company assets and related property and assets by way of non-refundable licence fees.

New members are required to pay an entrance fee (or joining fee), in accordance with the Constitution. This fee is a recognition of the contributions made by existing members to the acquisition and development of the Company assets.

Funds for the Company's activities are contributed by members. Member contributions are made by way of associated fees in equal proportions or in proportion to the number of members. When additional funding is required for major initiatives, members make additional contributions of funds in equal proportions.

Fees for members are determined annually by the Board with subsequent endorsement by members. The fees to be contributed by members are calculated with a view to ensuring that the Company has adequate financial resources to carry out all its activities for mutual benefit of members, and to ensure a surplus of funds available to the Company to meet any contingent adverse economic event, and to ensure adequate resources for ongoing enhancement and upgrading of technology.

Each year, members approve an improvement schedule based on planned resources. Occasionally a small number of members may request a special project outside of the improvement schedule which will be jointly funded through contributions to the Company. Any services developed from such special projects will become available to other members at the time of release, and if taken up by other members, an additional charge is passed back as a credit to the initial group of members that funded the project.

Some fees are charged on the basis that at least x% of the total fees are paid by members on an equal apportionment basis and the remaining x% is apportioned on a variable basis based on the number of members in each respective entity.

The Company provides support services for all members to enable the utilisation of the Company's services. Expenses incurred by the Company in providing the support services to members, are recovered on a cost-recovery basis from the member.

The cost of the annual conference is subsidised by sponsorship payments from third party suppliers with members contributing to costs by payment of registration and accommodation fees.

Surplus funds of the Company are invested from time to time and earn interest.

The Company's constitution prevents distribution of income and property to members while it operates, but allows for the surplus property of the Company to be distributed among its members on winding up or dissolution.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 59-35

Reasons for decision

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).[1] However, receipts from mutual dealings are not assessable income.

The mutuality principle provides that, where a number of people come together for a common purpose and contribute to a common fund in which they are all interested, any surplus of those contributions remaining after the fund has been applied to the common purposes that is then distributed to the contributors, is a return of funds and not income or profit. That is, income is not derived from dealings with oneself.

The principles of mutuality considered by Australian courts are summarised in RevesbyCredit Union at 112 CLR 564 at 574-5:

(i) Where a number of people contribute to a fund created and controlled by them for a common purpose any surplus paid to the contributors is not income but is to be regarded as a mere repayment of the contributors own money;

(ii) Incorporation of the fund is not important where provided the incorporated body which legally owns the fund is a mere entity for the convenience of members '...obedient to their mandate';

(iii) The fund must have been created for the common purpose and be owned or controlled wholly by the contributors;

(iv) Any contributions to the fund derived from sources other than payments from contributors cannot be taken into account in computing the surplus, including trading with members (for an example of trade with members: see FC of T v. Australian Music Traders Association 90 ATC 4536);

(v) Mutuality cannot apply unless at any given point in time there is [a reasonable relationship between the contributors to the fund and the beneficiaries of any distribution of surplus] (the position expressed in Revesby Credit Union requiring identity between contributors and beneficiaries is clarified in Coleabally Irrigation Mutual Co-Operative Ltd v. FC of T [2004] FCAF 250 (Coleambally) at paragraph 22 to mean a reasonable relationship).

The Company has the characteristics of a mutual association as:

•         it was incorporated to purchase services using contributions from members;

•         the service is used to enable members to manage their business;

•         members make regular contributions to ensure that the service is current and complies with statutory, regulatory and business requirements;

•         member contributions are calculated with a view to ensuring that the Company has adequate financial resources to carry out its activities and to ensure that funds are available if needed; the assets of the Company are beneficially owned by the members (although the Constitution prevents distribution to members while the Company is operating); and

•         members are entitled to a portion of the assets on winding up in such manner as shall be determined by the members at or before the time of dissolution, and in default thereof, equally among such members.

However, not all receipts received by a mutual association will necessarily be mutual. In North Ryde RSL Community Club Ltd v FC of T 2002 ATC 4293 the court stated:

... not all receipts by a club from members or from a third party on account of services or facilities made available to members are necessarily mutual receipts... They may be no more than trading receipts. It is the nature of the actual transactions in question, and not the fact that a benefit was received or a service used by members that will determine whether receipts derived are liable to, or immune from, tax (at 4306).

The Company receives a number of different fees from members and it is, therefore, necessary to consider whether each fee represents a mutual dealing.

Certain specified fees are required to be paid by all members.

These fees must be paid by members regardless of whether they use the service (not all members use the network). Some of these fees are charged on a fixed/variable model whereby x% of the total fees are paid by members on an equal apportionment basis and the remaining x% is apportioned on a variable basis based on the number of members in the respective entity of each of the members.

It is accepted that a reasonable relationship exists between what each member contributes and what they are entitled to receive. Members contribute as a class, they are entitled to use the assets whilst the Company continues, and they are entitled to a portion of the Company's assets on winding-up. Therefore, these specified fees paid by members to the Company are considered to be mutual dealings and, therefore, not assessable income of the Company.

Other specified fees are to be paid if members use the services.

A monthly fee is payable by all members who use the Company's assets and is additional to the service fee. It is charged out on a similar basis to the service fee (x% fixed and x% apportioned on a variable basis based on the number of members in the respective entity). All other fees are charged out on a cost recovery basis. The Company hosts an annual conference for members.

It is accepted that, in relation to these additional fees, a reasonable relationship exists between what each member contributes and what they are entitled to receive. Members contribute on a cost/recovery basis and these fees, when paid by members, are considered to be mutual dealings and not assessable income of the Company.

In case there is any doubt, any of the above fees that are paid to the Company from non-Company members for the use of any of the Company's assets or related services, or for attendance at the annual conference, are not mutual dealings and will be assessable income of the Company.

[1] 117 CLR 514 at p. 526

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