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Edited version of your written advice
Authorisation Number: 1012883952429
Date of advice: 10 November 2015
Ruling
Subject: Assessable Income - Mutual Receipts
Question 1
Are the amounts received by Company A for providing services to its members assessable income as defined by subsection 995-1(1) of the Income Tax Assessment Act 1997?
Answer
No
This ruling applies for the following periods:
Period ending 30 June 2015
Period ending 30 June 2016
Period ending 30 June 2017
Period ending 30 June 2018
Period ending 30 June 2019
The scheme commences in:
Period ending 30 June 2015
Relevant facts and circumstances
Background
Company A is a public company limited by guarantee.
Company A is governed by a Constitution ('the Constitution').
Company A Constitution
Under the Constitution, membership of Company A subsequent to the company's registration is limited to certain eligible organisations that meet a number of criteria.
The Constitution provides that the objects of Company A are to provide members with nominated and such additional services as Company A may offer from time to time and which members wish to accept. The Constitution also provides that Company A's funds are to be distributed in a manner that best attains the objects of the company.
Under the Constitution, members are liable to contribute an amount to the assets of Company A if the company is wound up.
On winding up of the company, the Constitution provides that the remaining assets of Company A belong to the members at the time of the winding up in proportion to their respective contributions for so long as they were members.
Amounts paid by members for services
Each Member signs an agreement with Company A. The terms of each agreement do not materially differ apart from differences in the amount of fees paid.
The amounts paid or potentially payable by members and received or receivable by Company A for services include the following:
• fees under the agreement
• a fee for membership and an annual subscription. These amounts may be different for different members and may also be nil.
Fees paid by members to Company A are based on an estimate of expected expenses of Company A in pursuing its objects.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 6-10
Income Tax Assessment Act 1997 section 6-15
Income Tax Assessment Act 1997 section 6-20
Income Tax Assessment Act 1997 subsection 995-1(1)
Reasons for decision
Question 1
Summary
The amounts received by Company A for providing services to its members are mutual receipts that are not assessable income as defined by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).
Detailed reasoning
The principle of mutuality is a legal principle established by case law and is based on the proposition that a taxpayer cannot derive income from itself. The principle recognises that contributions made by an organisation's members are not in the nature of income because income consists of monies derived from sources outside of the taxpayer (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 stated:
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 characteristics of organisations that can access mutuality for income tax purposes are provided in the ATO publication, Mutuality and Taxable Income. They 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 membership 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 fund.
Company A can access mutuality for income tax purposes. In particular the following factors are considered relevant:
• members of Company A as a single class collectively contribute and collectively benefit from the common fund.
• Company A is carried on for the collective benefit of its members by providing nominated services in which all members are entitled to participate.
• members make contributions to Company A to enable the company to engage in marketing, advertising and promotion services for the benefit of Members.
• The fees and subscriptions charged or chargeable to members can differ between members.
• As a company limited by guarantee, the ownership of Company A lies with its members who are the guarantors of the company.
• Company A is controlled by its members.
• members are entitled to the surplus assets of the fund upon winding up in proportion to their respective contributions for so long as they were members.
If an organisation can access the mutuality principle for income tax purposes, receipts derived from mutual dealings with members may be mutual receipts that are not assessable income.
Assessable income is defined in subsection 995-1(1) of the ITAA 1997 to have the meaning given by sections 6-5, 6-10, 6-15, 17-10 and 17-30. Relevantly, section 6-15 of the ITAA 1997 provides that an amount is not assessable income if it is not ordinary income and is not statutory income.
Members of Company A sign an agreement with Company A and pay fees for services. The Constitution also allows Company A to charge its members a fee for membership and an annual subscription. These amounts are provided to Company for the purpose of allowing the company to provide its members nominated services and are mutual receipts.
Mutual receipts are not in the nature of income. They are neither ordinary income under section 6-5 of the ITAA 1997, nor statutory income under section 6-10 of the ITAA 1997. If an amount is a mutual receipt, it is not assessable income as defined by subsection 995-1(1) of the ITAA 1997.
Conclusion
As the amounts received by Company A for services to its members are mutual receipts, they are not assessable income as defined by subsection 995-1(1) of the ITAA 1997.