Edited version of your written advice

Authorisation Number: 1013050480673

Date of advice: 13 July 2016

Ruling

Subject: Mutuality Principle

Question 1

Was the payment received by the company a receipt in respect of which the principle of mutuality applies, and not assessable to the company?

Answer

Yes.

This ruling applies for the following periods:

01 July 2015 - 30 June 2016

The scheme commences on:

01 July 2015

Relevant facts and circumstances

The company is an unlisted public company.

The unlisted public company structure exists only as a residential body corporate mechanism.

Each member of the company owns a parcel of shares in the company that gives them the right to sole and exclusive occupancy of a flat.

A member does not have title to the flat, but rather ownership is recognised by a share certificate. There are no plans attached to the share certificate indicating the boundaries of any flat.

The company applies the principle of mutuality to its income tax affairs such that contributions received by the company from members (levies) are considered mutual receipts and are not assessable to the company.

The company has no other ventures or businesses other than property ownership and management for the members.

A flat and its balcony

Attached to a flat (flat X) is a balcony that is not accessible by any member other than the member who owns flat X.

Since the commencement of occupation of the property, successive members owning flat X have had sole, exclusive and uninterrupted use of the balcony.

Elsewhere in the property there are a number of smaller balconies, the use of which is exclusive to the owner of the attached flat. In each case, entry to those smaller balconies is not possible other than through each individual flat. None of the owners of those flats has sought to pay money to clarify their rights to use the smaller balconies.

The Lease

The member (the owner of flat X) requested that the company clarify the use of the balcony to flat X by entering into an agreement called a Lease.

Under the terms of the Lease the company has received a one-off payment (labelled 'Rent') from the member for the sole, exclusive and uninterrupted use of the balcony.

The company continues to have rights of access and inspection that it has over all the flats, including flat X subject to the Lease. The Articles of Association of the company only permits residential use of the flats, and the Lease does not allow a change of such use. There is therefore no change to prior arrangements under the Lease. The company is not conceding any increase in the rights of the member under the Lease.

The company engaged a lawyer who prepared the Lease to provide an opinion as to whether or not the balcony is part of flat X, or part of the collectively owned assets of the company. It was their opinion that the balcony is part of flat X, and has been since the prior occupiers of flat X utilised the balcony for their own individual purposes, because of the practical issues at hand - such as ease of ingress and egress to and from flat X, the ability of other members to access the balcony, previous use of the balcony and the use of other balconies by individual flat owners. As such, they concluded that the balcony is not a collectively owned asset.

According to the lawyer, the member's request to enter into the Lease, despite the prevailing view that the balcony was already part of flat X, is explicable by the absence of any diagram that defines the boundary of each flat and the lack of any survey plan or specific mention of the balconies in the Articles of Association of the company.

The intention of the member was therefore said to seek comfort that the balcony will continue to be available for their use without interference from the company and should not be interpreted as being an acknowledgement that there were no existing rights to use the balcony.

The company also engaged the services of a firm of valuers to ascertain the value of the Lease. They believe that the transaction cannot be properly valued, as it is significant only to the member, meaning there is no open market nor evidence of similar sales. Nevertheless, the valuers concluded the payment was fair and reasonable.

This is the first transaction of this nature in the long history of the company and one that will likely not be repeated. It is not a development, a sale, or a rental, as there is no change to any asset, rights or accesses.

Use of funds

The company intends to treat the payment as an increase in the share capital of the company and will apply it to common costs for urgently needed repairs. The company runs at break even on a cash basis, as it manages the maintenance of the property only. Levies are raised to meet costs, and no more.

Reasons for decision

Summary

The receipt of the payment by the company will be subject to the mutuality principle and will therefore not be assessable to the company.

Principle of Mutuality

The principle of mutuality recognises that a person's income consists only of moneys derived from external sources, that is, from sources other than the person.

As a general principle, where a number of people 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; nor, if that surplus is distributed back to the contributors, does that surplus have the character of income in their hands (Colonial Mutual Life Assurance Society Ltd v FC of T (1946) 73 CLR 604).

With specific regard to amounts contributed by proprietors, Taxation Ruling TR 2015/3, at paragraphs 24, 25, 68 and 69, provide:

24. Amounts levied on proprietors by a strata title body in accordance with the State or Territory Acts which form part of a fund used for the day to day expenses, general maintenance and repair of common property or for the establishment of special purpose funds as set out under those Acts are mutual receipts and are not assessable to the strata title body.

25. Whether other receipts from members are mutual receipts depends on the nature of the transaction and must be decided on the facts and circumstances of each dealing by a process of evaluating and weighing a range of factors. Relevant considerations include:

• The relationship between an amount received by the strata title body and the common fund - that is, whether it is within matters that govern the mutual relationship between members such that it has the requisite link to the common fund.

• The purpose for which the payment is made - that is, whether the payment of an amount by a member to the strata title body is to meet the member's proportion of their mutual liabilities.

• The capacity in which an amount is paid - that is, whether the member is dealing with the strata title body in their role as a member.

68. Having regard to these principles, the Commissioner considers that the principle of mutuality applies to the following amounts paid by proprietors to the strata title body:

• Proprietors' levy - which is directed to for example, an administrative fund, or a sinking, reserve or special purpose fund.

• Payments for their use of personal property of the strata title body for example, washing machines.

• Fees paid for the collection of rents from the common property.

• Access fees paid for the inspection of records held by the strata title body, including the books of account, insurance policies, the strata roll, the strata plan and the minutes of meetings.

69. Conversely, the principle of mutuality will not apply to the following types of amounts:

• Payments by non-proprietors to the strata title body for their use of personal property of the strata corporation for example, washing machines.

• Access fees paid by non-proprietors for the inspection of records held by the strata title body, including the books of account, insurance policies, the strata roll, the strata plan and the minutes of meetings.

• Fines imposed by the strata corporation on tenants for breaches of by-laws.

• Interest and dividends from invested funds.

• Rental receipts from the leasing of common property set aside for the purposes of carrying on a business of leasing professional suites and shops.

Matters which govern the mutual relationship

As per paragraph 25 of TR 2015/3, the relationship between an amount received by the strata title body and the common fund - that is, whether it is within matters that govern the mutual relationship between members such that it has the requisite link to the common fund, is a relevant factor in deciding whether a receipt (other than an amount levied on proprietors in accordance with a State or Territory Act) from a member is a mutual receipt.

Whilst the payment by the member was made subject to the terms of the Lease, an agreement which doesn't govern the mutual relationship between members to the common fund, there are certain factors surrounding the payment which indicate that it nevertheless does have the requisite link to the common fund. These are:

• the fact that the balcony, and therefore the payment, doesn't relate to common property (as per the definition of that term in paragraph 11 of TR 2015/3);

• the fact that the terms of the Lease, including the payment, have not changed the pre-existing relationships and arrangements, such that the member does not as a result of the Lease have any new rights with regard to the balcony, nor has there been any change in the pre-existing mutual relationship; and

• the fact that the company will be treating the payment as a mutual receipt and therefore will be spending the proceeds of the payment mutually.

In conclusion, it is considered that this factor, on balance, points to a mutual receipt.

The purpose for which the payment is made

As per paragraph 25 of TR 2015/3, the purpose for which the payment is made - that is, whether the payment of an amount by a member to the strata title body is to meet the member's proportion of their mutual liabilities, is also a relevant consideration in finding whether a receipt is a mutual receipt.

As the company did not request or require the payment made by the member under the Lease to be made in satisfaction of the member's mutual liabilities, and no other member with a balcony attached to their flat has ever paid, or been required to pay, a sum in addition to a levied amount to clarify their exclusive right to use their balcony, the payment is not considered to have been made to meet the proportion of the member's mutual liabilities, but was rather made above and beyond the proportion of their mutual liabilities.

In conclusion, and despite the fact that the payment was not paid by the member to discharge an individual legal obligation of theirs either, this factor does not point to a mutual receipt.

The capacity in which the amount is paid

As per paragraph 25 of TR 2015/3, the treatment of a receipt from a member as a mutual receipt also depends on the capacity in which an amount is paid - that is, whether the member is dealing with the strata title body in their role as a member.

It is considered that, in paying the payment amount under the Lease, the member dealt with the company in their role as a member of the common fund, and not in any other capacity which puts the member in the same position as a non-member.

This factor points to a mutual receipt.

Conclusion

The payment made by the member to the company under the Lease does not constitute any of the amounts identified as payments to which the Commissioner considers that the principle of mutuality applies (as per paragraph 68 of TR 2015/3), nor does it constitute any amount identified as a payment to which the Commissioner considers that the principle of mutuality will not apply (as per paragraph 69 of TR 2015/3).

With regard to TR 2015/3 and the relevant considerations set out in paragraph 25 of that ruling (as above), it is concluded, on balance, that the payment received by the company was a mutual receipt and subject to the mutuality principle. The payment will therefore not be included in the assessable income of the company.