Edited version of your private ruling

Authorisation Number: 1012585051190

Ruling

Subject: Mutuality

Question 1

Is the income derived from your members mutual income and not assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the income derived from members from mutual dealings is mutual income.

Question 2

Is the Organisation required to lodge income tax returns?

Answer

Yes, if the taxable income is more than the taxable threshold for a non-profit company.

This ruling applies for the following periods

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on

The scheme has commenced.

Relevant facts and circumstances

The Organisation is a company limited by guarantee. The Organisation does not have a share capital and is governed by a Constitution.

The Constitution of the Organisation contains appropriate non-profit and winding up clauses.

The following information was extracted from the Organisation:

The Organisation is an organisation which:

· Is member based

· Provides networking opportunities &

· Functions as an information portal.

· Brings professionals and organisations together

By:

· Organising networking events around Business, Socio-Political, Cultural and Sports oriented subjects and speakers

· Facilitating communication and information exchange via its internet portal;

Achievements FY13

· Quality speakers and events

· Bi-annual breakfast meeting

· Social/Sport activities; barefoot bowling, hockey, bushwalk, tennis

· Grown our member base, both individual and corporate

· Newsletters.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

Question 1

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts, which is called ordinary income.

The principles and tests for ascertaining whether a receipt is income according to ordinary concepts have been laid down by the courts over the years. One of these principles is the principle of mutuality.

Mutuality is a common law principle developed in the United Kingdom and first considered in connection with insurance companies. The mutuality principle is not specifically mentioned in the Income Tax Assessment Act 1997 (ITAA 1997), however, it has been accepted and applied narrowly in relation to Australian taxation law.

The principle is based on the proposition that a taxpayer cannot derive income from itself. In the case of corporate entities, the principle recognises that contributions by proprietors are not in the nature of income because income consists of monies derived from sources outside of the taxpayer (The Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334 at 337).

The principle is summarised in Revesby Credit Union Co-operative Ltd v. Federal Commissioner of Taxation (1965) 112 CLR 564 at 574 where McTiernan J said:

The principle of mutuality seems to me to be settled. Where a number of people contribute to a fund created and controlled by them for a common purpose any surplus…is not income but is to be regarded as a mere repayment of the contributor's own money…Incorporation of the fund is not relevant…What is required is that the fund must have been created for the common purpose and owned or controlled wholly by the contributors.

The principle of mutuality is based on the proposition that a taxpayer cannot derive income from itself. Receipts derived by a taxpayer from mutual dealings with its members are not assessable income. Such receipts are called mutual receipts. Mutual receipts include:

· member subscriptions and levies

· fees from members using the organisation's facilities (for example, gyms, pools and squash courts)

· drinks and food sold by the organisation to members

· amounts members pay to attend dinners, parties, dances or social functions arranged by the organisation

· amounts members pay to attend a talk, workshop or presentation arranged by the organisation

· the sale of items, such as souvenirs, to members.

Not all dealings with members are subject to the mutuality principle. The ATO publication Mutuality and taxable income contains the following information on non mutual dealings:

Mutuality ceases to apply when a member individually 'contributes' - say by paying rent - to secure a right over the use of a collectively owned asset (where that right is not available to members as a class), and the member benefits from the use of that asset for their own purposes. This breaks the complete identity between contributors and participants as a class in the common fund.

Where the organisation transacts with a member in this way, the activity is in the nature of a trade and is for a taxable purpose. For example, leasing a club facility to a member for their individual benefit in earning their assessable income is in the nature of trade and so the lease income is assessable to the club.

The Organisation is a company limited by guarantee made up of members. The objects of the Organisation do not involve a trade or profit. The Organisation has an appropriate non-profit and winding up clause in its Constitution. The Organisation is a non-profit organisation.

The income received from the Organisation's members, from mutual dealings with them, are mutual receipts subject to the principle of mutuality and will not form a part of the assessable income of the Organisation.

Question 2

The ATO publication Mutuality and taxable income contains the following information on non-profit companies lodging income tax returns:

Non-profit companies

For your organisation to be a non-profit company it must meet the 'non-profit requirement'. This means:

· it must be a company that is not carried on for the purposes of profit or gain to its individual members, and

· its constituent documents must prohibit it from making any distribution, whether in money, property or otherwise, to its members.

Your organisation can be a non-profit company and still make a profit. However, any profits it makes must be used to carry out its purposes. The profits must not be distributed to members.

The prohibition on distributions applies while the organisation is operating and on its winding up. If it permits its members to transfer the assets to themselves on winding up, it is not a non-profit company.

A non-profit company can make payments to its members as bona fide remuneration for services they have provided to it, and as reasonable compensation for expenses incurred on behalf of the organisation.

LODGMENT RULES

Non-profit companies

Non-profit companies that are Australian residents have a taxable threshold. If the taxable income of a non-profit company in an income year is below the threshold (which is $416 per year), it is not required to lodge a tax return for that year.

The Organisation is a non-profit company as it has an appropriate non-profit clause and winding up clause in its Constitution which prohibits it from making a distribution to its members while operating or if it was to be wound up.

Taxable income does not include receipts derived from mutual dealings with members and the expenses incurred to get mutual receipts are not deductible.

If the taxable income for the Organisation is less than the taxable threshold (currently $416) it will not be required to lodge an income tax return.