Edited version of private ruling

Authorisation Number: 1011882745270

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Ruling

Subject: CGT- Principle of Mutuality

Question 1

Is the capital gain made on the sale of a property owned by an incorporated association disregarded under section 118-12 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Financial year ended 30 June 2012

Financial year ended 30 June 2013

The scheme commences on:

01 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In December 1990, the taxpayer, a not for profit entity purchased a vacant block of land adjacent to the club premises.

The vacant block of land was used and maintained as a car park for the benefit of its members.

The taxpayer now intends to sell the vacant block of land which would result for the taxpayer making a capital gain.

The proceeds from the sale of the land will be utilised to renovate the taxpayer's existing premises, which will include a car park.

The taxpayer is not an entity that is exempt from tax under any of the categories in Subdivision 50-A of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-12,
Income Tax Assessment Act 1997 Section 6-20 and
Income Tax Assessment Act 1997 Subdivision 50-A.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'Part IVA general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

The principle of mutuality is a common law doctrine which recognises that one cannot make a profit out of oneself. As such, a person's income consists only of moneys derived from external sources. This was the basis of the decision in Bohemians Club v. Acting FC of T (1918) 24 CLR 334, where it was held that the surplus of subscriptions and contributions from club members over the expenditure of the club did not constitute income derived by the club. This view has been reaffirmed in many subsequent cases.

Section 118-12 of the ITAA 1997 provides that a capital gain or capital loss made from a CGT asset that is used solely to produce 'exempt income' is disregarded.

'Exempt income' is ordinary income or statutory income that is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law (section 6-20 of the ITAA 1997).

However, subparagraph 118-12(2)(a)(ia) of the ITAA 1997 states that the exemption does not apply if the asset was used to gain or produce an amount that is non-assessable non-exempt income because of section 59-35 of the ITAA 1997.

Section 59-35 of the ITAA 1997 provides that:

An amount of ordinary income of an entity is not assessable income and not exempt income if:

(a) the amount would be a mutual receipt, but for the entity's constituent document preventing the entity from making any distribution, whether in money, property or otherwise, to its members; and

(b) apart from this section, the amount would be assessable income only because of section 6-5.

It has been established by the courts that mutual receipts are not income. If an amount is not income it cannot be 'exempt income'. This view is expressed in Taxation Determination TD 92/181.

On this basis, the property in question was not used to derive 'exempt income'. It follows that the capital gain made on the sale of the property used as the association's car park is not disregarded under section 118-12 of the ITAA 1997.

The principle of mutuality does not apply to a surplus that is derived from sources outside the contributors to the common fund such as interest from the investment of part of the fund (Revesby Credit Union C-Operative Ltd v. FC of T (1965) 112 CLR 564). Any surplus repaid to contributors must be a return of their contributions not a return on their contributions (Fletcher v. I T Comm (1971) 3 All ER 1185).

Therefore, the principle of mutuality does not apply when calculating the association's taxable income as the capital gain to be made is a surplus which is derived from sources outside the contributors to the common fund.